On Jan. 24, UK FCA issued letter to wholesale brokers re strategy.
FCA published Dear CEO letter regarding strategy for supervising wholesale brokers.
Follows UK FCA Jan. 2023 issued portfolio letter to wholesale brokers, see #159109.
Sector Overview
Regulator pleased that there continues to be vibrant wholesale broking market in UK despite persistent headwinds, financial markets continue to be challenging globally.
Regularly experience increased levels of uncertainty and periods of heightened volatility, caused by geopolitical tensions, supply-demand imbalances, inflation.
Despite this, wholesale brokers continue to perform strongly as a sector, but growing trend of largest players being able to benefit more from current market conditions.
FCA has observed gradual change in sector with larger firms acquiring smaller ones, while some weaker mid-sized and smaller firms are exiting market altogether.
However, strong core of specialist firms continues to exist and thrive.
Previous Cycle
In last 2 years FCA has engaged with firms on a wide range of issues including liquidity risk management, financial crime, culture and non-financial misconduct.
Generally feels that firms in portfolio are improving in these areas, but improvement is not evenly distributed, meaning more work needed, particularly with outlier firms.
Sets out considerations on each of above areas in connection with work in last cycle.
Strategy for 2025-2027
Given uneven nature of progress made in areas of strategic importance, will focus primarily on ensuring regulatory compliance, good standards of conduct from firms.
Aims to ensure that firms with healthy and compliant culture are not put at a disadvantage to firms with a poor culture, FCA will intervene where firms have continuously failed to bring themselves up to the standards required.
The regulator has identified 4 strategic areas as focus of its program of proactive work.
Broker Conduct
Brokers are main revenue earners for their firms and are also main points of contact for clients, have access to sensitive and valuable information, can lead to risks.
Such as inherent conflict of interest where a broker's personal interest might go against that of their client, preventing latter from achieving best outcomes.
Also, firms could be incentivized to actively ignore instances of misconduct if broker engaging in financial/non-financial misconduct is also a significant revenue producer.
FCA will conduct targeted work to assess how firms manage their brokers, expects firms to have suitable controls in place to detect misconduct, take appropriate action.
Culture
Good conduct stems from good culture, and this starts with strong tone from the top.
From FCA's supervisory experience, firms governed by diverse boards with a suitable mix of skills and experience, provide more effective challenge to firm's management.
Leads to better decision making, drives success for firms, commercially and culturally.
Regulator launched non-financial misconduct (NFM) survey in 2024 to understand how firms identify, report and investigate instances of NFM, will use survey results for proactive engagement with portfolio, with strong focus on outlier firms from survey.
For these firms will, in particular, scrutinize; polices and procedures in place for reporting NFM concerns, including evidence of firms having good speak up culture.
Management of NFM cases by firms once they are reported by the firm's staff: and processes firms have in place for ensuring that fair outcomes are reached.
Business Oversight
Good culture needs to be complemented by a robust control environment, firms need to have effective and comprehensive risk and control oversight framework.
Apart from usual detective and monitoring controls, FCA will be particularly interested in firms' use of remuneration tools such as deferrals, clawback, malus for misconduct.
As it considers remuneration a critical component of firms' toolkit when dealing with brokers' non-compliance, wants to test if firms using these measures consistently.
Financial Resilience
While progress has been made, prudential risks nevertheless remain in the portfolio.
Vital that wholesale brokers maintain adequate levels of capital and liquidity.
FCA will focus on ensuring that firms which were subject to its liquidity review have acted on its feedback and implemented good practices in this area.
More broadly, will test wholesale brokers' contingency funding plans and frameworks to assess whether firms' plans adequate for liquidity challenges caused by stress events.
Overall, expects firms to review their levels of liquidity continuously to ensure that they comply with the Investment Firm Prudential Regime (IFPR) at all times.
Where material weaknesses identified, FCA likely to impose additional requirements.
Next Steps
By end Mar. 2025, FCA expects all CEOs to have discussed this letter with their fellow directors and/or board and to have agreed actions and/or next steps.
