In a pivotal move on November 8, 2023, the Financial Conduct Authority (FCA) issued a yet another "Dear CEO" letter this time addressed to wealth managers and stockbrokers, outlining critical Consumer Duty driven directives and expectations. This letter comes at a crucial juncture, signalling a new, proactive ‘targeted, intrusive and assertive’ FCA stance to supervision and oversight. Given the Consumer Duty is now demanding firms take a holistic and data driven approach to evidencing constructive conduct, competence and culture, we are already witnessing financial advice firms receiving unsolicited information requests to gain evidence for;
- Enhanced Customer Due Diligence (CDD): The FCA is underscoring the need for firms to strengthen their Customer Due Diligence processes. The letter emphasises the importance of robust KYC (Know Your Customer) procedures to mitigate the risks associated with money laundering, fraud, and other financial crimes.
- Cybersecurity Measures: Considering the escalating cybersecurity threats, the FCA’s focus stresses the significance of bolstering defences against cyber-attacks. Firms are urged to prioritise cybersecurity measures to safeguard client information and maintain the integrity of financial systems.
- Compliance with Market Conduct Rules: The FCA is reiterating the importance of adherence to market conduct rules. Firms are being reminded to maintain the highest standards of market integrity, ensuring fair and transparent dealings to safeguard investor confidence.
- Communication of Material Information: The FCA emphasizes the need for timely and accurate communication of material information to clients. Firms are urged to keep clients informed about any developments that may impact their investments, promoting transparency and trust.
- Service and product MI and data: Firms are required to provide evidence they have;
- Clear focus of the needs and objectives of the target market
- Products and services are aligned to meet client needs, risk profiles and objectives
- Evidence that consumer vulnerability is reassessed
- Evidence clients understand all aspects of their products and services
- Systems and controls to uprate clients form retail to professional status
- Evidence to justify complex / unregulated investments against suitability rules
- Client understanding for FSCS/FOS protection limitation
- Processes for value for money and cost of products and services continually assessed
- Strategy to make changes when poor value is identified
- Robust Internal Controls: Firms are urged to review and enhance their internal control frameworks. This includes regular assessments of risk management processes, internal audit functions, and overall governance structures to ensure they are resilient and adaptive to evolving market dynamics. In particular firms are now urged to ensure their business register in relation to all business conducted over a selected period with information across;
- Name of client and adviser firm
- Details of where the business originated
- Whether any business was advised, execution only or insistent client based
- Product details provided with investment amount(s) or premium payable (incl frequency)
- Whether the business is replacement business, pension transfer or switch with ceding scheme details comprehensively provided.
- All business underlying investments to be evidenced
- If SIPP, SSAS, (Q)ROPS are advised, the provider, confirmation on advice provided with underlying investment details and adviser charges
- Introducer agreements
- Centralised investment/Retirement Proposition details across funds, portfolios, governance arrangements (investment committee) Dates and reasons for addition/removal of funds and meeting minutes in last 12 months.
If this isn’t enough, the FCA are also asking for details on compliance monitoring including;
- Internal/external audit reports within past 48 months
- Complaints register information
- Senior Management Function (SMF) statements of responsibilities (SoR)
- Full Professional Indemnity Insurance (PII) policy and proposal form details
- Full details of adviser charges across initial and on-going with justification of value
- Regulatory Reporting Accuracy: The FCA emphasises the importance of accurate and complete regulatory reporting. Firms are expected to diligently comply with reporting requirements, aiding the FCA in its oversight role and contributing to the overall stability of the financial system.
It is clear the FCA are now acting and walking their talk when it comes to Consumer Duty and testing firms validating processes for the Duty implementation phase. This showcases the need for firms to ditch checklist and tick box compliance activities and embrace RegTech which can provide all the relevant data and MI required, at the touch of a button, to evidence the good work they have completed, gain a gap analysis, and prove that action is taken when required to continually comply with the Duty and maintain on-going client good outcomes.
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