Just when you thought it was safe to go back in the water

This was the tagline written for the movie Jaws 2 and like the shark in the film, the FCA appears to be showing its teeth.


Those who read the industry press will have seen numerous articles following issue of the FCA’s Dear CEO letter entitled FCA Requirements for Wealth Management and Stockbroking Firms, issued on 8 November, but several of ATEB’s advice firms also received the five page missive.

But it’s not addressed to advice firms!

The letter is clearly aimed at fund management groups, DFMs and stockbrokers and advice firms could be fooled into thinking that it doesn’t apply to them (see later), but it would perhaps be unwise to ignore this, particularly for those who operate CIPs and use DFMs.

For those who haven’t seen or read the letter it’s available here and the FCA’s statement of intent becomes pretty clear early on, with firms being told that they have:

  • lost consumers significant sums to scams and fraud, and have enabled money laundering, causing significant negative economic, market and social damage.
  • exposed consumers to inappropriately high-risk or complex investments and provided consumers with poor value products and services.

The first bullet point may not necessarily be that much of an issue in advice firms (it’s a pretty damning statement nonetheless), but the second line is fairly unambiguous and this is followed up with:

Therefore, you and your leadership team should fully understand the level of exposure your firm has to the risks and harms set out in this letter and invest significant time and energy (and if necessary, capital) to manage them. This also requires resolving the root cause of these harms. In our experience, they often arise from ineffective and/or conflicted leadership and governance, combined with ineffective systems and controls.

Not addressed to advice firms?

Perhaps the Dear CEO letter doesn’t do this directly, but other indicators that the regulator is taking a more focused and targeted approach lie within further bullet points, where they expect firms to: not carry out tick box compliance exercises or outsource responsibility to third parties and ensure your SMF 16/17 holders have the required experience, skills, and independence.

Anyone who has read some of our recent articles will be aware that individuals are increasingly being taken to task and it’s when the letter starts focusing on Consumer Duty expectations that things come into clearer focus. Commentary such as that below is very much to the point.

Firms are often entrusted with wealth acquired through decades of prudent investment and hard work. Yet many firms undermine this trust by pushing products or services that are too high-risk and/or too complex for most consumers.

These products and services, which can be highly profitable for firms, are often loss making for consumers themselves. In the long run, these practices not only damage the firms that do this but also can unfairly discredit the industry as a whole.

Still not convinced?

We didn’t have to wait long and there it is on page 3. Price and Value.

The FCA is defiantly adamant that it isn’t a price regulator and it may not tell firms directly what they should charge, but whether intentionally or subliminally, it certainly creates that impression, with commentary like: We continue to see firms charging for services which are not delivered (such as ongoing advice). And: We are also concerned that firms are not consistently providing clear disclosures on their fees or charging structures. As a result, consumers can be unaware of high fees that significantly reduce their investment returns. In particular, we have seen firms charge high average fees and charge particular individuals very high fees. We will challenge firms to justify such high charges.

What is addressed directly to advice firms

We’re aware that the FCA’s Supervisory Team have been contacting firms (as they’ve promised) with information requests. One such email asked for the following within two weeks:

  • a copy of the firm’s organogram to enable us to see a visual structure of the firm including functions and relationships
  • a copy of the statements of responsibility to identify the responsibilities the FCA approved SMF manager holds
  • a copy of the firm’s recent PII documents
  • details about the framework the firm have put in place to monitor whether its communications are supporting customer understanding and helping its customers to make effective, timely and properly informed decisions including copies of any Management Information used
  • a copy of the firm’s complaint registers and file covering the last two years
  • a copy of the business register including business conducted over the last two years including a list of clients who have had any annual review
  • an explanation of the different ways the firm acquires new clients
  • an explanation of how the firm knows it is meeting the Duty

Sound familiar?

Convinced now?

The Dear CEO letter spells out quite clearly how the FCA intends to go about things.

Our supervision will become more targeted, intrusive and assertive. We have already started a major drive with short notice and unannounced visits. We will use the Consumer Duty to intervene quickly against potential or actual consumers harms, on an individual or multi firm level. We will consider in future engagement whether you have taken appropriate action to rectify the root cause of any issues, which is often poor and ineffective leadership, governance, systems and controls and conflicts of interest management. We will take action if you have not.

Most of the firms we deal with, and this includes some DFMs, do the right things. The firms are well run, have good leadership, robust systems and controls and are able to evidence that they provide good client outcomes, but there are many more out there that cannot and it’s a fair bet that if faced with the information request detailed above, they would struggle to provide everything required.

We don’t highlight these issues for the fun of it and prevention it is said, is better than cure. It’s always easy to be wise after the event, but as we keep seeing, firms are still under the impression that it’ll never happen to them. It can and does, so how long are firms that don’t do it well prepared to take the risk? The FCA appears to be showing its teeth, and they look mighty sharp.


Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

This is clearly a warning shot across the bows for many and whilst the Dear CEO might not have directly targeting advice firms, we think that the underlying message does. The additional requests for information are evidence that the FCA is obtaining data from firms, so those that receive them could be on the radar, especially if they can’t provide all that’s asked for. The FCA understandably targets larger firms having the greatest impact first, but all firms should take note. One way or another the regulator does seem to be trying to influence firms’ pricing and costs and although it won’t formally state what firms should charge, it seems quite willing to challenge this. A recent article in the press suggested that circa 37% of firms have changed their charging structure as a result of Consumer Duty but it didn’t say how many of them had increased their costs! Commentary we’ve received or witnessed from the FCA has suggested that they don’t have a problem with fixed percentage charging, but they do where a client pays more for the same service than someone else, which we’ve commented upon previously. We expect that there will be more to follow too, especially from the Retirement Income Advice thematic review, the outcome of which is due imminently. By the way, we know that Jaws was a Great White and that the image is of a Tiger Shark!

Action Required By You

Firms would be wise to consider the FCA’s commentary. Those that have buried their heads in the sand thinking that Consumer Duty would go away, or didn’t apply to them probably have a greater chance of regulatory scrutiny than previously. If your firm receives one of the requests for information could you supply everything in ten working days? If your firm would struggle or you need help with Consumer Duty or any of the areas within the information request please contact us.
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About the Author

Paul has in-depth experience across a wide spectrum, having headed up compliance, T&C, monitoring, oversight and MLRO functions previously. He was also an IFA for some time so can see things from more than one angle.

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