In November 2023, the FCA has issued a Dear CEO letter to wealth management and stockbroking firms, outlining its expectations for how they should comply with the new Consumer Duty and prevent financial crime.
Firms are expected to review their policies, procedures and controls in key areas and take appropriate action to address any gaps or weaknesses. The FCA also warns that it will take enforcement action against firms that fail to meet its standards and expectations.
The letter highlights these areas of concern that the FCA has identified from its supervisory work, such as:
- Governance and oversight
- Risk assessment and management
- Customer due diligence and ongoing monitoring
- Transaction monitoring and reporting
- Staff training and awareness
- Record keeping and audit trail
This paradigm shift is crucial for wealth managers, stockbrokers, and compliance officers to prepare for. It’s not just a regulatory change; it’s a call to elevate client service and transparency to new heights.
Why is the FCA intensifying supervision?
Very simply, the numbers didn’t add up. For example, in a wealth data survey conducted, 49% of portfolio managers and 69% of stockbrokers identified “no vulnerable consumers”, even though 50% of people will be classified as vulnerable over their lifetime.
To help Wealth Managers and Stockbrokers better understand what is expected of them, we’ve developed this guide to the FCA Dear CEO letter:
What is the FCA New Consumer Duty?
The FCA’s new Consumer Duty embodies principles of transparency, fairness, and responsibility, radically altering how wealth management and stockbroking services are delivered. The regulation focuses on the wellbeing and satisfaction of clients, imposing rigorous standards on service providers.
The Impact of the new FCA Duty on Client Relationships
This new Duty will positively transform client communication and service expectations. Wealth managers and stockbrokers must prioritize transparent and fair treatment in all interactions. It’s about enhancing the value delivered to clients, not just in terms of financial gains but in overall experience and trust.
The Key Takeaways of the new FCA expectations for wealth managers and stockbroking firms:
- Going forward the FCA expect firms to have implemented the Consumer Duty in full.
- Be clear and transparent with your pricing and fee structure at every stage.
- Always align advice and products to a consumer’s risk profile and refrain from advocating products that they do not understand and are too complex.
- The FCA advise to not carry out tick box compliance exercises or outsource responsibility to third parties.
- You must ensure your business has robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way.
- A new, dedicated financial crime function in the FCA will focus on identifying firms with fraud, scams or money laundering indicators.
- The FCA has already started conducting short-notice, unannounced visits and will increase this volume of inspections, particularly in suspected instances of financial crime.
- The FCA expect your firm to change and bad Product & Service practices if they exist.
- The FCA expect firms to regularly assess the overall cost and value for money of your products and services to make changes when poor value is identified.
How can you comply with the FCA’s Consumer Duty?
- Ensure your products and services remain aligned to your consumer’s needs, risk profile and circumstances and yourclients have a full understanding of all aspects of the investment, and you should not exploit their limited understanding.
- Reassess the vulnerability status of your consumers based on the FCA’s guidance.
- Not uprate consumers from retail to professional unless this is supported by robust systems and controls, given the loss of protections.
- Fully justify any complex and/or unregulated investments your firm offers, with a clear view of the suitability or appropriateness for the consumer.
- Ensure consumers understand any limitations to the Financial Ombudsman Service /Financial Services Compensation Scheme consumer protection status and associated risks of investments.
What do Compliance Managers and MRLO’s need to ensure?
In order to comply with the FCA’s new expectations, you need to ensure:
- Your firms is not knowingly or otherwise engaged to facilitate frauds, scams, or money laundering.
- You fully understand your firm’s financial crime risks by identifying who their clients are, including their expected transaction patterns and corporate structure.
- Firms should not carry out tick box compliance exercises or outsource responsibility to third parties.
- Firms need to ensure they have robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way.
- Firms need to ensure their SMF 16/17 holders have the required experience, skills, and independence.
- Firms need to share and report information about wrongdoing with the FCA or relevant law enforcement agencies immediately.
- Anyone with compliance and risk roles need to read and fully implement the FCA’s Financial Crime Guide: A Firm’s Guide to Countering Financial Crime risks and Financial Crime Thematic Reviews, which outline the steps firms must take to defend against financial crime.
Further steps can be taken to ensure you comply and deliver on the wider expectations of the FCA:
- Follow the rules set out in the FCA Clients Asset Sourcebook.
- Implement the Consumer Duty in full.
- Consider the FCA DEI consultation paper proposes new rules and guidance to help ensure firms can take decisive and appropriate action.
- Abide by the FCA Financial Crime Guide (FCG): A firm’s guide to countering financial risk, which outline the steps firms must take to defend against financial crime.
FCA Advice to Wealth Managers and Stockbrokers
- Revise Compliance Strategies
Adapting to this new regulatory landscape involves overhauling existing compliance practices. Incorporating technology and identity verification tools will be key in meeting these new standards. Additionally, firms must focus on training staff and fostering a culture that places consumer interests at the forefront.
- Operational Changes for Wealth Managers
To comply with the Consumer Duty, operational practices for wealth managers must evolve. This involves ensuring accurate client data and verification processes and integrating these principles into every stage of the client lifecycle, from onboarding to ongoing management.
- Technology’s Role in Helping Wealth Managers and Stockbrokers Comply
Technology is a powerful ally in maintaining records, monitoring, and reporting as mandated by the FCA.
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