The FCA has published a Dear CEO letter to wholesale brokers, setting out its new supervision strategy for firms.
In the last 2 years, the FCA has engaged with firms on issues including risk management, financial crime, culture and non-financial misconduct. It observes that while firms in the portfolio have shown improvement in these areas, improvement has not been evenly distributed.
Previous work
On prudential risk management, the FCA will be publishing a summary of good and poor practices it observed during its review of firms’ liquidity risk management frameworks. It expects firms to review the paper closely to identify how they might strengthen their frameworks further.
On financial crime, the FCA is maintaining its focus on scenario where firms with weak controls may be exploited to launder money through capital markets. It expects firms to read its Money Laundering Through the Markets report in full, incorporate good practices, and identify and remedy poor practices.
On remuneration and broker misconduct, the FCA continues to observe inconsistent application of the Remuneration Code. It has asked firms who have failed to implement appropriate remuneration policies to take immediate remediation action, and is engaging directly with firms it believes are not adhering properly to the rules on deferrals and non-cash variable remuneration
New supervision strategy
The FCA has identified 4 strategic areas as the focus of its programme of proactive work:
- Broker conduct – the FCA will be conducting targeted work to assess how firms manage their brokers. It expects firms to have suitable controls in place to detect misconduct, and to take appropriate action against those found to be involved in misconduct;
- Culture – the FCA plans to use the results of its non-financial misconduct survey, to scrutinise policies and procedures, management of misconduct cases reported by staff and processes for ensuring fair outcomes. It will focus particularly on ‘outlier’ firms from the survey data;
- Business oversight – the FCA is particularly interested in how firms use remuneration tools such as deferrals, clawbacks or malus in cases of proven misconduct; and
- Financial resilience – the FCA will be focussing on ensuring firms subject to its liquidity review have acted on their feedback and implemented food practices. It will also be testing firms’ contingency funding plans and to assess whether firms have adequate frameworks to deal with potential liquidity challenges posed by stress events. Where the FCA identifies material weaknesses in firms compliance with the Investment Firm Prudential Regime, it will likely impose additional capital and liquidity requirements.
The FCA expects boards to have discussed its letter by the end of March 2025, and to have agreed next steps.