In September 2021, the FCA issued a letter to wealth management and stockbroking firms with a reminder to CEOs to ensure they keep focus on ‘key harms’ in their sector. These included fraud or market abuse, facilitating scams and also a reminder that should the firm fail, it had suitable control practices in place to mitigate any potential loss of client assets. The second key part of the communication covered keeping clients fully informed of the overall cost of their investments. The essence of the communication detailed the FCA’s expectations for work carried out by firms and made an appeal to CEOs, who they FCA sees as being responsible for providing a healthy business culture within their own firms.
A key part of coherence to the guidance lies within ensuring that high quality data is available to produce accurate regulatory reporting. In order to do this, firms will need to decide on and build a comprehensive data strategy and maintain appropriate systems to support that strategy. Equally, they must ensure controls are in place to facilitate the production and reporting of that data on a timely basis. Firms that fall into this category will need to ensure clear focus on prudential governance and MIFID II.
Prudential governance and evolving regulations
The FCA’s prudential rules ensure financial firms not only maintain sufficient capital and liquidity, but also have adequate risk controls in place. The framework builds on the EU’s legislature, formed in the main by MiFID II, CRR/CRD and AIFMD, with the new Investment Firms Prudential Regime (IFPR), specific for UK investment firms.
MIFID II was created to regulate financial markets and to improve protections for investors, building on the ground work laid by its predecessor and specifically addressing the lack of liquidity and increased risk of defaults on settlements and deliveries, which culminated in the financial crisis of 2007-2008. MIFID II also aims to ensure that consumers fully understand financial products in which they are investing, including the charges and fees that they will have to bear not only at the time of the purchase of the product but also throughout the life of this investment.
As detailed in its final guidance paper of June 2020 (FG20/1) the FCA expects that all firms operate robust risk management and control frameworks, minimise the risk of harm and hold sufficient financial resources such that they can meet with FCA threshold conditions at all time, including capital and liquidity necessary to effect an orderly wind-down.
The IFPR goes further to enhance the framework for UK investment firms, including wealth managers and stockbrokers, introducing a set of prudential rules specifically designed to address the risks faced and posed by their activities. Under this regime, firms will need to consider a number of additional factors, including (but not limited to):
- whether their broader corporate group should be subject to the same rules,
- delivering regular reporting on capital, liquidity and monitoring,
- designing a remuneration policy which appropriately links risk with reward and manages conflicts of interest, and
- developing a formal capital, liquidity and risk assessment process
Actions for wealth managers and stockbrokers
With MIFID II having been in play for some time, the IFPR imposing new requirements on top and the FCA having contacted wealth managers and stockbrokers specifically, it is clear the FCA is focussed on such firms, studying whether they have sufficiently robust systems and controls to mitigate the risks of harm arising from financial crime, market abuse, fraud and scams. Via reporting measures, firms will need to demonstrate compliance to the necessary regulatory provisions.
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