Wealth managers: preparing for increased regulatory scrutiny

The FCA has outlined its intention to pursue more ‘assertive, intrusive, proactive and data driven’ supervision of wealth management and stockbroking firms, as it looks to deliver on its expectations with regards to financial crime and the Consumer Duty (opens a new window). With the associated likely increase in regulatory interaction and potential for an uptick in formal interventions and third-party claims, it is key that firms understand their financial crime risks and Consumer Duty obligations, and how best to meet them.

Heightened FCA scrutiny anticipated

The FCA recently released its latest ‘Dear CEO’ letter (opens a new window) to the sector, urging wealth management and stockbroking firms to take action.

The letter acknowledges the role that wealth managers and stockbrokers often play in helping consumers to meet their financial goals. However, it also highlighted ways in which the FCA consider that firms can cause harm to consumers, in particular:

  • Losing consumers significant sums to scams and fraud, and enabling money laundering, causing significant negative economic, market and social damage

  • Exposing consumers to inappropriately high-risk or complex investments and providing consumers with poor value products and services

The FCA has stated its intention to remain ‘holistic of all harms’. Nevertheless, the letter also sets out the regulator’s intention to ensure that firms prevent financial crime and meet their Consumer Duty outcomes, by:

  • Conducting more short notice and unannounced visits

  • Significantly increasing the use of its formal intervention powers for the worst cases

The FCA will also initiate wider measures, including:

  • Implementing and operating a data led approach to identify outliers and problem firms, and to target the firms in its supervision accordingly

  • Identifying firms with key fraud, scams, or money laundering indicators via its dedicated financial crime function 

  • Considering whether firms have taken appropriate action to rectify the root cause of any issues, and take action if not

Potential risks and insurance guidance

The FCA has already demonstrated an appetite to enforce its standards in pursuit of better consumer outcomes. According to the regulator’s Annual Report for 2022/23 (opens a new window), the introduction of new rules for its financial promotions regime in 2022 preceded the withdrawal of 8,582 financial promotions, an increase of 1,498% compared to 2021. Accordingly, the prospect of the FCA intensifying its enforcement efforts should be taken seriously.

The possibility of an increase in short notice and unannounced visits, plus greater use of formal intervention powers, represents increased risk for firms moving forwards, particularly where they cannot clearly demonstrate compliance with regulatory requirements. Even those firms which can demonstrate compliance are exposed, given the likely time required to deal with regulatory visits and the potential legal costs associated with any resultant queries.  

In particular, the FCA letter highlights what it believes to be a typical ‘root cause’ of issues, which includes ‘poor and ineffective leadership, governance, systems and controls and conflicts of interest management’. This places a strong emphasis on the role of directors and officers in taking action to meet financial crime and Consumer Duty objectives.

Further risk comes from complaints from clients and other third parties. Claims data shows that where a regulator finds deficiencies in a firm’s approach and execution, complaints and litigation from others tends to follow, with claims management companies being particularly active in the space.

Risk mitigation for wealth managers

The FCA letter sets out a clear expectation for firms with regards to both financial crime and the Consumer Duty. These include:

  • Understanding financial crime risks by identifying who clients are, including their expected transaction patterns and corporate structure

  • Not carrying out tick-box compliance exercises, or outsourcing responsibility to third parties

  • Implementing robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way

  • Ensuring SMF 16/17 holders have the required experience, skills, and independence (opens a new window)

  • Sharing and reporting information about wrongdoing with the FCA or relevant law enforcement agencies immediately

  • Ensuring products and services remain aligned to consumer’s needs, risk profile and circumstances

  • Assessing the vulnerability status of consumers based on FCA guidance (opens a new window)

  • Ensuring consumers fully understand all aspects of their investment products and services, and that firms do not exploit limited understanding

  • Not uprating consumers from retail to professional unless this is supported by robust systems and controls, given the loss of protections

Further information can be found in the FCA’s Financial Crime Guide: A firm’s guide to countering financial crime risks (FCG) (opens a new window) and Financial Crime Thematic Reviews (FCTR), which outline the steps firms must take to defend against financial crime.

As part of insurance renewal preparations, firms should articulate to insurers their risk management approach, including efforts taken to meet their financial crime and Consumer Duty objectives. This includes monitoring and recording evidence of action taken, and the identification of poor actions leading to a process of ongoing learning and improvement. The Lockton team will work with you to identify those areas to highlight to insurers and help those with a strong profile differentiate themselves in the market. 

For further information, please visit Lockton’s Financial Institutions (opens a new window) page, or contact:

Laura Skaanild, Senior Vice President, Global Professional & Financial Risks

E: laura.skaanild@lockton.com

Ian Saxelby, Vice President, Global Professional & Financial Risks

E: ian.saxelby@lockton.com

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