Wealth management priorities from an assertive regulator

November 2023

The FCA has issued a Dear CEO letter (PDF 241KB) to wealth managers and stockbrokers, setting out its latest supervisory priorities and reminding firms of their responsibilities. Its “strong messages” will drive its supervisory activities over the next two-year cycle. 

While two core themes are given the most emphasis — full implementation of the Consumer Duty, and preventing financial crime and fraud — wider areas of focus also feature on the regulator's agenda. In addition, the FCA will focus on robust governance in all aspects of its supervision. 

CEOs and boards should proactively assess their firms' exposure to the risks set out in the letter and ensure they can demonstrably and robustly evidence that these are managed appropriately.

The FCA's priorities have emerged from concerns about serious harm to consumers. Compared with the 2021 portfolio letter (PDF 191KB), the increased focus on Consumer Duty implementation and more granular expectations are unsurprising. And it is noteworthy that the prevention of financial crime and scams is carried forward and remains a critical focus. 

In addition to the two key priorities, a list of broader topics is highlighted at the end of the letter. These include operational resilience, CASS, preventing market abuse, ESG, and improving diversity and inclusion and preventing non-financial misconduct (on the latter, see a summary of the FCA's proposals here).

In the detail, the FCA has flagged specific examples that have been challenges for several years (such as investment suitability and ongoing advice charges) and is now likely to use Consumer Duty to address these. 

The key topics of focus in the letter are:

"Meaningful changes" should already have been made but the FCA sees many firms failing to deliver good consumer outcomes. Failings are organised against three of the Consumer Duty outcomes:

Price and Value:

Examples are given of specific concerns (e.g. overtrading portfolios to generate transaction fees, or not passing on fair interest on client money balances — also noted in the FCA's recent platform letter). Several of the examples mentioned here, such as concerns regarding ongoing advice charges, have been on the FCA's radar for many years and it is likely to be losing patience.

Firms should review the full list of examples provided and make changes where poor value is identified. More generally, the FCA states that firms need to embed Consumer Duty into the day-to-day culture and the running of the firm (see an overview of Day 2 considerations for firms here).

Products and Services, and Consumer Understanding:

The FCA expects firms to have a clear focus on the needs and objectives of the target market and that products/services are aligned to consumers' needs, risk profile and circumstances. Customer vulnerability should be reassessed against FCA guidance and firms should not exploit customers' limited understanding.

There is a specific warning about moving clients from retail to elective professional status. Related to this, firms need to fully justify complex/unregulated investments from a suitability perspective, and ensure clients understand limitations to FOS or FSCS coverage.

Baseline expectations have not changed: not facilitating money laundering or scams, reporting wrongdoing, and the need to understand financial crime risks. The FCA also refers firms to its financial crime guide (PDF 460KB) and notes:

• The importance of holistic compliance exercises (not "tick box" approaches or outsourcing of responsibility).
• The need for robust systems and controls.
• The ongoing requirement for SMF 16 and 17 holders to have the required skills and expertise.

The FCA acknowledges itself that it has sent "strong messages" and holds accountability to act firmly with CEOs. The FCA is clear that its supervision is becoming more data led, proactive, and will become "more targeted, intrusive and assertive". It also notes it has established a new function dedicated to consumer investment financial crime and will use Consumer Duty to facilitate its interventions. It is therefore critical that firms act swiftly to understand the impact of the points raised: 

• Firms will be sent a survey by the FCA in December 2023, tailored to the risks posed by their business models. 
• Firms should carry out an impact assessment on the risks set out in the letter and the examples of failures provided by the FCA, and address them as needed. This exercise should be evidenced and documented.

KPMG in the UK has a dedicated Wealth and Asset Management practice with relevant expertise and experience that can assist you with assessing the risks set out in this letter and provide assurance that you are meeting these requirements. 

If you need assistance with any of the priorities flagged in the FCA's letter, or with regulatory compliance more broadly, please get in touch.