Response to FCA Letters - Wealth management & stockbroking

On 8 November 2023, the FCA published a Dear CEO letter to wealth management and stockbroking firms. Specifically the letter is intended for firms that typically manage portfolios or provide retail focused stockbroking services or operate as a private bank or provide outsourced services to wealth managers. The FCA expect firms to proactively tell them if work done in relation to the points in the letter results in remedial action or identifies harm.

The FCA outlines its assessment of the sector's key harms and its updated supervisory model which will be more targeted, assertive, intrusive, proactive and data driven. The letter signals the FCA's intention to use the Consumer Duty to intervene against consumer harm. This will result in more short notice and unannounced visits and increase in use of formal intervention powers. The dedicated financial crime function for consumer investments will focus on identifying consumer risk.

The letter contains strong messages to the sector which it considers to be one of the higher risk sectors of financial service firms due to the threats of scams, fraud and money laundering, as well as the risk and complexity in some of the investments made available to consumers.

The FCA sets out its expectations across two areas where it has identified particular harms:

• Financial Crime: money laundering and investment scams/fraud

• Consumer Duty: Unsuitability risky and complex products and low value services

The FCA has been clear that whilst it has focused on priority harms, firms are fully expected to comply with all regulatory obligations, for example, Operational Resilience, CASS, Market Abuse, ESG compliance, and Diversity, Equity and Inclusion.

Financial Crime

The FCA has warned against the harms of money laundering and financial crime and their damaging impact on consumers, markets and the wider society. The FCA expects firms to:

• Prevent financial crime: not knowingly or otherwise engage or facilitate frauds, scams, or money laundering;

• Enhance KYC: understand the financial crime risks by identifying who their clients are, including their expected transaction patterns and corporate structure;

• not carry out tick box compliance exercises or outsource responsibility to third parties;

• ensure they have robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way;

• Recruit experienced & independent SMF 16/17 (ensure they have the required experience, skills, and independence);

• share and report information about wrongdoing with the FCA or relevant law enforcement agencies immediately; and

• read and fully implement the Financial Crime Guide: A firm's guide to countering financial crime risks (FCG) and Financial Crime Thematic Reviews (FCTR), which outline the steps firms must take to defend against financial crime.

Consumer Duty

The FCA note that they have seen many wealth managers and stockbrokers failing to meet their obligations to provide a service that delivers good consumer outcomes. They call out specific failings in the following areas:

Products & Services and Consumer Understanding: The FCA has noted that many firms still offer products which are too high risk and/or too complex for consumers. Other issues include obscured risks and fees which are unsuitable for the consumers. Execution-only stockbrokers continue to promote products which are too complex to understand.

The FCA expects firms to:

• have a clear focus of the needs and objectives of their target market;

• ensure products and services remain aligned to the consumer's needs, risk profile and circumstances;

• reassess the vulnerability status of the consumers based on the FCA's guidance, particularly the 49% of portfolio managers and 69% of stockbrokers from the wealth data survey who identified no vulnerable consumers, even though 50% of us will be classified as vulnerable over our lifetime; 

• ensure consumers fully understand all aspects of the investment products and services, and that the firm does not exploit limited understanding;

• not opting up consumers from retail to professional unless this is supported by robust systems and controls, given the loss of protections;

• fully justify any complex and/or unregulated investments the firm offers, with a clear view of the suitability or appropriateness for the consumer;

• ensure consumers understand any limitations to the Financial Ombudsman/FSCS consumer protection status and associated risks of investments; and

• ensure communications are clear, fair and not misleading and take steps to test consumer understanding.

Price and Value - the FCA identifies issues in firms charging clients for services which are not delivered, not providing "clear and consistent disclosures on fees and charging structures", and not passing on fair interest.

The FCA expects firms to:

• regularly assess the overall cost and value for money of their products and services; and

• make changes when poor value is identified.

The FCA remind firms to also be embedding to Duty into the day-to-day culture and running of the firm, as well as customer support aspects of the Duty.

The letter signals a change in approach to supervision by the FCA with an increased focus on firms which may be causing the greatest harm. The increased use of supervisory tools and powers will also come with an increased expectation that firms will take appropriate action to rectify root cause of any issues and will address poor and ineffective leadership, governance, systems and controls.