Wealth Management and Stockbroking - FCA Priorities - Thistle Initiatives

What happened?

In its latest Dear CEO letter (featuring wealth management and stockbroking regulation), the FCA has provided a welcome update on its current two-year supervision strategy, commencing in April 2019.

The regulator identified in the letter, four key areas in which it believes wealth management and stockbroking firms may be causing harm to their customers and/or the market in which they operate:

1. Eroding confidence in the industry through mismanagement of conflicts of interest and market abuse
2. Allowing customers’ savings and investments to be negatively impacted by fraud or investment scams – or through inadequate asset controls or client money provisions
3. Reducing the total value of customers’ savings or investments by adopting handling procedures or execution processes that fail to deliver the best outcomes
4. Preventing customers from properly understanding the costs of their services through inadequate or insufficient disclosure of costs and charges.

Fraud, scams and abuse

Noting that it will continue taking action against wealth management and stockbroking firms who betray customers’ trust by involving their portfolios in unsuitable investments or scams – or by engaging in market abuse – the FCA stressed that firms must ensure portfolios are fully aligned with customers’ risk profiles. Those firms who fail to do this, whether deliberately or not, disproportionately damage trust in the industry. The inclusion of whistleblowing phone and email details underlines the role the regulator expects firms to play in identifying individuals involved in unethical behaviour.

Best execution

In the context of wealth management and stockbroking firms’ responsibility for achieving the best possible results for their customers when executing client orders or passing them on for execution, the FCA raised specific concerns over the use of Retail Service Provider (RSP) platforms. Its Investment Platforms Market Study, published earlier this year, found that 20% of RSP orders failed to receive a price at least as good as the best available across all UK trading venues. The regulator urged all firms to consider their best-execution arrangements, particularly those relying on a single RSP. The FCA also reiterated that firms must have effective day-to-day execution processes, contingent arrangements for periods of market distress, and ‘clear, comprehensive and effective’ oversight and monitoring arrangements.

Costs and charges disclosure

In the light of the revised disclosure requirements introduced with MiFID II, the regulator noted that within a sample of 50 wealth management and stockbroking firms operating in the retail investments sector whose ex-ante costs and charges it had looked at, most understood their obligations, but many interpreted them in different ways. They tended to do better at disclosing their own costs and charges than those of relevant third parties. The FCA again stressed that firms must review their disclosures to ensure they satisfy all requirements – both ex-ante and ex-post. For further details on good and bad practice in this area, click here.

SM&CR

The FCA’s letter also highlighted the forthcoming extension of the Senior Managers and Certification Regime (SM&CR) to FCA solo-regulated firms from December 2019. Drawing attention to the guidance available on its website, the regulator stressed that Enhanced firms must submit details of all approved persons converting to senior management functions, statements of responsibilities and responsibilities maps. Read more on our SM&CR page here.

Brexit

With EU withdrawal looming again, the regulator underlined wealth management and stockbroking firms’ responsibility for acting in customers’ best interests and maintaining clear communication at all times. Firms with customers in the EEA must be clear about how they intend service existing contracts with such customers in accordance with local law and the expectations of national regulators. The FCA’s guidance on this topic is available here.

Switching

The regulator emphasised that improving the switching process remains a high priority, particularly in terms of wealth management and stockbroking firms communicating clearly with customers who are switching. Firms that operate retail platforms are encouraged, the FCA said, to consider taking part in the STAR initiative, which aims to improve efficiency in the transfer process across the retail investment and pension sectors.

How can Thistle help you?

There is much for wealth management and stockbroking firms to consider and act upon, in the light of the regulator’s latest statement of priorities. All firms should review their anti-fraud policies, best execution arrangements, costs and charges disclosures (for retail firms), SM&CR project planning, Brexit planning and switching arrangements (for platform operators). For certain areas (SM&CR and Brexit), external timescales are making these considerations urgent.

If you’d like to know more about any of the topics covered above – or to learn more about how Thistle can help – please get in touch via info@thistleinitiatives.co.uk or call us on 0207 436 0630.