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What has happened? 

In November 2023, the FCA issued a Dear CEO letter setting out its assessment of the wealth management and stockbroking sector’s key harms and its updated supervisory priorities: namely preventing financial crime and ensuring that these firms are meeting Consumer Duty outcomes. 

What are the key points of the letter?

We have identified the key points to be;

• The scale of consumers in the sector is significant, with 1.8 million portfolios and 14.3 million stockbroking accounts. The level of assets under management, combined with the seriousness of the key harms, make this one of the higher risk sectors of financial service firms in the FCA’s jurisdiction.
  
  
• Firms’ leadership teams should fully understand the level of exposure their firms have to the risks and harms set out in the letter and invest significant time and energy (and if necessary, capital) to manage them.
  
  
• FCA supervision is shifting to become more assertive, intrusive, proactive and data driven. It is conducting more short notice and unannounced visits where it is deemed appropriate, and is significantly increasing the use of formal intervention powers for the worst cases. 

•    The FCA expects firms to: 

• • not knowingly or otherwise engage with or facilitate frauds, scams, or money laundering,
  • have a clear focus on the needs and objectives of their target market,
  • ensure their products and services remain aligned to their consumers’ needs, risk profile and circumstances,
  • reassess the vulnerability status of their consumers based on FCA 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 that consumers fully understand all aspects of their investment products and services, and that the firm does not exploit limited understanding,
  • not recategorise consumers from retail to professional status unless this is supported by robust systems and controls, given the loss of protections - 14% of firms recategorised consumers in the last 12 months,
  • fully justify any complex and/or unregulated investments offered, with a clear view of the suitability or appropriateness for the consumer, and
  • ensure consumers understand any limitations to the Financial Ombudsman/FSCS consumer protection status and associated risks of investments. 

• The FCA has seen many wealth managers and stockbrokers failing to meet their obligations to provide a service that delivers good consumer outcomes, as required by the Consumer Duty. It expects firms in this sector to;
   
  • have a clear focus on the needs and objectives of their target market,
  • ensure their products and services remain aligned to their consumers’ needs, risk profile and circumstances,
  • reassess the vulnerability status of their consumers based on FCA 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 that consumers fully understand all aspects of their investment products and services, and that the firm does not exploit limited understanding,
  • not recategorise consumers from retail to professional status unless this is supported by robust systems and controls, given the loss of protections - 14% of firms recategorised consumers in the last 12 months,
  • fully justify any complex and/or unregulated investments offered, with a clear view of the suitability or appropriateness for the consumer, and
  • ensure consumers understand any limitations to the Financial Ombudsman/FSCS consumer protection status and associated risks of investments.
• The FCA continues to see firms charging for services which are not delivered (such as ongoing advice), overtrading on portfolios to generate high transaction fees, and providing a product or service which does not align with the needs of consumers (such as an expensive discretionary offering for a low-risk consumer). It is also concerned that firms are not consistently providing clear disclosures on their fees or charging structures.
• The FCA is implementing and operating a data-led approach to identify outliers and problem firms in this sector. This allows it to target the firms that require the greatest oversight and that may be causing greatest harm.
• The FCA welcomes the 99% response rate last year to its data survey. This resulted in a number of interventions, skilled person reviews and improvements to systems and controls, governance, leadership and products and services. The FCA will build on this by sending all firms a further survey in December 2023, which will be tailored to risks posed by the firm’s business model.
• Supervision will become more targeted, intrusive and assertive. A new, dedicated financial crime function for consumer investments will focus solely on identifying firms with key fraud, scams or money laundering indicators. The FCA will increase engagement on non-financial misconduct, with anecdotal evidence supported by recent cases reported and negative press articles.
• The FCA has already started a major drive with short notice and unannounced visits, particularly for financial crime.
• The FCA expects firms to proactively inform it if work done by them on the above points results in remedial action or identifies harm.

How can we help you? 

Thistle Initiatives has supported wealth management and stockbroking firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in meeting and complying with FCA regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your financial crime or Consumer Duty arrangements, or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.