On 13 June 2019, the FCA addressed a Dear CEO letter to Wealth Management and Stockbroking firms setting out its view of the key risks of harm that firms could pose to their customers or the markets in which they operate.

The FCA outlined four key ways in which customer harm could occur in this sector:

  1. By having reduced levels of savings and investments due to fraud, investment scams and inadequate client money, or assets controls;
  2. By losing confidence in the industry’s ability to deliver their financial objectives due to mismanagement of conflicts of interest and market abuse;
  3. Through reduced levels of savings and investments due to order handling procedures and execution processes that do not deliver best outcomes; and
  4. By being unable to understand the costs of services provided by firms, due to insufficient or inaccurate disclosure of costs and charges.

The FCA will expect all firms to consider how their activities could crystallise these risks and how best to mitigate them.

In response to these risks, the FCA set out its Wealth Management and Stockbroking supervision strategy. This is built upon the FCA’s approach to supervision strategy publication, which highlights how it will identify, prevent, reduce or correct potential and actual harm.

In this blog, we explore the key considerations for firms under each area of the FCA’s supervision strategy.

1. Fraud, investment scams and market abuse

The FCA remains focused on instilling trust in the financial services sector.  Recent television campaigns for SmartScam and published warnings about online fraud relating to Crypto-currency and Forex scams are testament to this. 

For authorised Wealth Managers, the letter highlights abuse of trust specifically in relation to suitability and market abuse. 

“Client portfolios must be aligned and managed to the risk profile of the client. We expect firms to ensure suitability and not include high risk investments inappropriately.”

Implicitly linked to this will be core requirements set out on conflicts of interest and product governance. In addition, the FCA’s recent Market Watch newsletter has highlighted the importance of call recording to provide assurance to compliance functions and senior management regarding the effective identification of potential misconduct and contribute to market abuse surveillance.   The revised Markets in Financial Instruments Directive (“MiFID II”) raised the regulatory standard and expectation in these areas, and the regulator will expect firms to adhere closely to these fundamental principles when providing Wealth Management and stockbroking services, particularly to retail customers.

Key considerations include:

ECRS 12. Best execution

Best Execution was another area where MiFID II increased the expectations on firms and was also a key consideration in the FCA’s investment platform market study. A key challenge for the wealth management industry is to ensure that appropriate execution factors are considered specific to the asset type; and in that regard the FCA highlighted limitations as to how the Retail Service Provider (RSP) trade execution system is used.

Importantly, firms must be able to demonstrate that they are delivering good execution for their clients.  Firms should review and be satisfied with the best execution arrangements of the RSP they are directing orders through in line with FCA COBS 11 best execution and client order handling requirements. This includes reviewing the RFQ (“request for quote”) process, execution on winning quote process and the timeliness of execution.

The above can be achieved through conducting periodic testing of trades using market data to inform a risk based sampling process by pulling market and liquidity metrics that indicate execution difficulty and the potential detriment associated with failing to achieve best execution.

To identify potential best execution outliers, firms should establish appropriate pricing benchmarks aligned to instrument type to ensure accurate setting of price deviation thresholds.  Thresholds should be subject to a formal review process on a periodic basis to ensure accuracy.

Key considerations include:ECRS 23. Cost and charges disclosures

MiFID II required firms to provide more comprehensive costs and charges information to their customers. The Delegated Regulation states that firms should aggregate all costs and associated charges for the investment or ancillary services provided to the client and also outlines a firm’s obligation to provide full ex-ante and ex-post cost information on an annual basis. The revised requirements are intended to increase transparency to enable customers to make a more informed decision about investment products and services. 

Through its supervision work, the FCA has already reviewed the ex-ante and ex-post disclosures from a sample of 50 MiFID investment firms in the retail investment sector.  It found that discrepancies in how firms had interpreted the rules around costs and charges disclosures to their customers and in particular, focused on firms that had made inadequate disclosure of relevant third-party cost and charges.

Given the FCA findings, firms should ensure they review their disclosure approach against the MIFID II cost and charges requirements and identify whether there are areas which can be enhanced.

Key considerations include:ICRS 34. The Senior Managers and Certification Regime (SMCR)

The extension of the SMCR to all FSMA authorised firms is intended to foster a culture of greater individual accountability. The extension of the SMCR seeks to unify the standards applied to all financial services firms and apply a consistent approach throughout the industry. Wealth Management firms should be advanced in their SMCR programmes and implementation given there is now less than six months to the 9 December 2019 implementation date. The FCA indicated in its “Dear CEO” letter that it may undertake a number of assessments of key governance document submissions after implementation and so firms should ensure they have covered all relevant steps needed to prepare.

For further guidance on SMCR, to obtain some of our insights and lessons learnt or find key SMCR contacts, please see our recent publication, The clock is ticking – will you be ready?.

5.Investment Platform Market Study

The FCA’s investment platforms market study found that switching platforms was often difficult. As a result, it outlined key actions it intended to take before publishing its final report, including a supervisory review of costs and charges disclosures and monitoring of progress against improving the ease of switching platforms.

Consequently, in its Dear CEO letter, the FCA highlighted that firms who are not already in involved in the STAR initiative should consider becoming involved as a recommended way of improving their switching process and ultimately, achieving the best outcomes for their customers.

6. How Deloitte can help

We have a team of regulatory and conduct risk experts with a dedicated focus on the investment management and wealth sector.  Based on our understanding of regulatory expectations, and working with our extensive network of clients, we have identified industry good practice in each of key areas core to the FCA’s supervisory strategy.  Working closely with our Risk Analytics colleagues, we have also developed a number of RegTech solutions which can offer efficient and effective methods for meeting increasingly challenging regulatory expectations. If you wish to discuss any aspects of the Dear CEO letter, or for a more general conversation, please do not hesitate to contact one of our colleagues listed below.