Readers of the FCA’s Dear CEO letter to wealth managers and stockbrokers (sent in November 2023) will have noted a distinct shift in the FCA’s tone. This was the regulator in combative, sabre-rattling mode for this “higher risk” sector – calling out the work it expects firms to have completed and warning CEOs of the tougher consequences that will follow where serious misconduct is identified.

The FCA used the letter to acknowledge the scale and impact of the sector, highlighting the harms it poses to consumers, detailing the recent issues it’s been tackling with firms, and signposting its plans for increasingly data-led “intrusive and assertive supervision”. Warning shots were fired on both financial crime and the consumer duty, with specific reference to a new, dedicated financial crime function focused solely on the sector.

The FCA also name checked CASS, diversity and inclusion (including non-financial misconduct), and operational resilience as areas of ongoing supervisory focus.

Key topics

We’ve also seen more ad-hoc information requests on key topics as part of the regulator’s transition to being more data led, especially since its survey from December 2023. The FCA has used these notices to analyze and detect the risks of harm it warned against in the letter, undertaking faster and more robust regulatory interventions where things are not to its liking. Potential focus areas continue to include elective professional clients, portfolio turnover, complex/high-risk products, high-charging services and service delivery.

While the key messages within the letter were relatively simple, the consequences have been challenging for many. It’s important to:

• take note of the key risks that are being highlighted;
• understand whether and how your firm is exposed to these risks;
• ensure you have invested the necessary time, energy, and resources to manage them;
• be ready to demonstrate this when the FCA sends out future tailored surveys;
• expect more targeted and increasingly assertive supervisory action as a result.

We’ve been helping firms across all the areas called out in the letter. And while it’s clear that a lot of work has been completed, many still have further to go to meet these revised expectations, especially in known problem areas like high-risk products. This also includes areas where the Consumer Duty has raised the bar, such as price, value, and consumer understanding.

Financial crime

The FCA called out cross-sector losses to scams and fraud through “greed or incompetence”, and expects firms to “fully implement” the guidance in its Financial Crime Guide, which covers the full range of financial crime risks from fraud and money laundering to market abuse. The regulator also mandated the implementation of this guide, which likely poses challenges for some.

Key areas of focus on financial crime include:

Transaction monitoring

The FCA expects firms to monitor customer transaction patterns and understand whether they are expected or not. This is likely to require firms to have modern, robust systems and controls: consuming significant volumes of data, piecing it all together, and providing much deeper visibility into client behavior. Achieving this requires significant investment and far higher standards of data hygiene.

Financial crime risk assessments

The regulator has been clear that there’s still more firms can do to understand the breadth of financial crime risk within their client bases, and the way they offer products and services. This makes the quality and depth of any risk assessment key to success. It also means finding ways to provide a rich, detailed view that can be assessed and mitigated across the firm.

This will require “digging deeper” into risks at a more forensic level. A clear articulation of the risks you face is the starting point, and this needs to be understood at the highest level and be baked into your strategy. Then, through appropriate and effective risk-based controls, you can clearly demonstrate how you’re managing that risk inside of your risk appetite.

Reliance

Taking greater responsibility and being more forensic about the financial crime risks customers pose will bite within the wealth management sector in areas such as reliance. Many rely heavily on the due diligence work done by others and, although we’ve seen a decline in recent years, it’s still widely used. Platforms, and firms interacting with them, use reliance, although the regulatory risk of this strategy can be complex.

Sanctions risk – effective screening systems

As a result of new and ongoing global conflicts, sanctions risk remains top of mind. Accordingly, the FCA has adopted its “intrusive and data-driven” approach to understand the effectiveness of firms’ sanction screening and payment screening capabilities.

We have first-hand intel from clients that the approach being taken is certainly intrusive, having required significant time, money, and resource outside of normal day-to-day operations. As the FCA increases engagement within the sector, so will the focus on the performance of quality sanction screening.

Consumer Duty

The FCA expects the implementation of the Consumer Duty to have already resulted in “meaningful change” at business, service, and proposition level. Expect to be asked what you’ve changed because of the Duty and be able to demonstrate those changes.

The following areas of focus were highlighted, informed by the failings the regulator has seen already.

Target market

You’re expected to have a clear and detailed understanding of the needs and objectives of your target market. You’ll need to define your target market not only in terms of wealth and portfolio size, but by other key factors like investment goals, life-stage, sophistication, and knowledge and experience.

Ongoing alignment to consumer needs

Ensure your products and services remain aligned to your consumer’s needs, risk profile, and circumstances throughout the product / service lifecycle. The key issues here are likely to be around the quality and timeliness of fact-find data and ensuring services are being used as intended. For example, acting when you identify investment accounts with large, uninvested cash balances for extended periods.

Vulnerability

You’re expected to reassess the vulnerability status of your consumers based upon the FCA’s guidance. Surprisingly, the regulator found that 49% of portfolio managers and 69% of stockbrokers identified no vulnerable consumers, even though 50% of us will be classified as vulnerable over our lifetime.

Suitability and appropriateness

This focus is driven by the findings from work on high-risk investments, and the impact of the Consumer Duty on how firms design their products and services. The regulator wants you to ensure consumers are able to make effective investment decisions. It’s important that you:

• ensure consumers fully understand all aspects of their investment products and services – not exploiting any information asymmetries caused by limited financial knowledge and experience;
• fully justify any complex and / or unregulated investments, with a clear view of the suitability or appropriateness for the consumer;
• not uprate consumers from retail to professional unless this is supported by robust systems and controls, given the loss of protections;
• ensure consumers understand any limitations to FOS / FSCS protection linked to the above.

Price and value

The FCA is using the Duty to target several areas it believes result in or contribute to consumers receiving poor value. These include:

• charging for services not delivered (such as ongoing advice);
• overtrading on portfolios to generate high transaction fees;
• placing consumers in high-charging products / services not matched to their needs, such as expensive discretionary services for low-risk consumers;
• not passing on fair interest and / or charging fees on client money balances;
• not providing clear disclosures on charging structures and specific fees.

You’re expected to review whether these issues apply to your business on an ongoing basis and make changes where poor value is identified.