The FCA has sent a letter to wholesale brokers also advising the firms about what its supervisory focus will be over the next two years.

The regulator is concerned that firms lack the expertise required to correctly evaluate their liquidity risk and are “underestimating their liquidity needs”. While the FCA acknowledges that “there are limits to capital and liquidity that can be held” against unprecedented stresses it suggests that more extreme stress events, including those that constitute systemic events, should be modelled. Liquidity is a serious concern for the regulator because of the potential for disorderly wind-downs leading to potential contagion and market disruption. And the letter explicitly states that the FCA will be targeting firms to ensure that they are complying with all aspects of the Investment Firm Prudential Regime (IFPR).

Concerns remain

The regulator remains concerned about remuneration structures that are incentivising brokers to favour short-term results over client best interests. It is drawing attention to its MIFIDPRU Remuneration Code introduced in January 2022 and includes specific remuneration policy and practice requirements, including those requiring firms to structure remuneration in a way that leads to prudent decision making. In connection with this higher risk, firms are being asked to identify material risk takers and ensure that they are subject to a more stringent remuneration regime.

The letter also emphasizes the need for adequate skills and experience needed both at the board and senior management level in order to manage risk and identify and resolve issues. It highlights persistent weakness in the vetting of new hires. The regulator, the letter suggests, will have “little sympathy” for firms whose offences are found to be the result of “hiring individuals who have been disciplined elsewhere”.

Control deficiencies

Finally, in its investigations the FCA has found deficiencies in the firms’ control functions, particularly those connected to AML and market abuse. If nothing else, the letter should induce management to review client on-boarding as well as surveillance and recordkeeping measures, including the adequate resourcing of these functions, to ensure that these are compliant with the rules and able to mitigate risk.