Wealth Management Wake-Up Call: Unpacking the FCA’s “Dear CEO” Letter
On the 8 November the FCA published a “Dear CEO” Letter for Wealth Management & Stockbroking Firms with extremely assertive messaging. Directed to the accountable people, these letters are often the result of recent thematic work or regulatory change to communicate and renew expectations. In this blog we’ll take a high-level look at the general points raised and the key messages being called out on its core themes; Consumer Duty and Financial Crime:
Consumer Duty:
The Consumer Duty is here and will be enforced! Three months on and the message is stark “we expect you to have implemented the Consumer Duty in full”. There is no grace period, this letter is explicit in calling out Firms in what are quite blunt statements about potentially underhand business practices and not delivering good outcomes. Firms should be ensuring their preparations leading up to 31st July are now sustained and embedded. This isn’t a tick box exercise. So how have you got comfortable that you’ve achieved this?
Customer Understanding: Customer’s must understand the products on offer. The FCA “have seen” the industry not being transparent about product risks. Suggesting some Firms are taking advantage of existing relationships and leveraging trust to push overly complex and unsuitable products for their target markets. Firms must review their sales processes and culture. Ensuring brokers genuinely understand their customers’ needs, have integrity, promote appropriate products and are incentivised accordingly. This work relies on judgment, so how do you know you’re at the right level?
Delivery of Price & Value: The FCA specifically called out fees & charges for investment advisory services, that simply aren’t being delivered upon. Firms have also been called out on not disclosing fees, instances of overtrading to generate more fee revenue and not passing on interest rate benefits. You must routinely and intrinsically assess your fee structures and products, ensuring they deliver true value and be proactive in making changes. What mechanisms do you have in place to make this happen and how confident are you that you are getting it right?
Data-Led Regulator: The narrative continues! Here we see an example of the regulator citing specific statistics to call out firms around their lack of awareness of “vulnerable” customers within their target markets. My opinion is that this ties back to the Customer Understanding and trust point. The regulator has obtained this data from surveys and it is likely they will ramp up data submission requests from Firms going forwards. You need to ensure that you have appropriate MI frameworks in place to enable top-down monitoring of compliance with the Consumer Duty. Please see our previous blog on Consumer Duty MI: www.avyse.co.uk/insights/consumer-duty-data-data-everywhere-but-does-it-make-you-think
Financial Crime:
Read, implement and embed: The letter explicitly mentions some key publications (the Financial Crime Guide and Thematic Reviews) and whilst it would be easy for me to say read them, Firm’s need to understand them, need to have people who can apply them, need to know how to measure if controls are working or aren’t. There are the Avyse Partners gap analyses of recent regulatory censures to help you take demonstrable action in line with FCA expectations.
Regulatory focus on the financial crime system and control frameworks for these types of firms has got much tougher: But how does that work in practice? A dedicated financial crime function for consumer investments, focusing solely on identifying firms with fraud, scams or money laundering indicators has been established. Off the back of this, the FCA are conducting visits with little-to-no warning. This is a step change and where firms are found not to be following the well-publicised expectations, serious action is likely to be taken. If you work for a firm in this area, ask yourself honestly - if the regulator turned up at your firm tomorrow morning, would you be prepared? See our blog about FCA financial crime visits.
In general, this letter is brutally aimed at wider cultural issues within the sector – and they have made it clear that they intend to turn up at firms “unannounced” in order to tackle integrity and reputation across the industry as a whole. This letter must be considered carefully by the accountable individuals.
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