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Two publications in the space of two weeks give a strong indication that the FCA continues to be dissatisfied with the approach to compliance in the wholesale brokers sector. As a result, wholesale broking firms can expect ongoing scrutiny, and additional regulatory thematic work, over the next two years.
First out was the FCA ‘Dear CEO’ letter, which included a strong statement for brokers. According to the letter, ‘brokers in wholesale markets have made less progress than other sectors in embedding a culture of good conduct, and so action to raise standards across the sector has become urgent.’ The letter identified four key areas where wholesale brokers are often seen to be deficient:
- Remuneration – some compensation arrangements incentivise poor conduct, and don’t properly balance financial outcomes with other qualitative factors
- Governance – firms may fail to balance the individual power of highly successful brokers with the need for appropriate senior management and board oversight
- Trading capacity – trading arrangements are often complex, and firms are perceived to have poor visibility of the trading capacity in which they are acting for individual transactions. (For example as the trade agency, matched principal or on an OTF)
- Financial crime and market abuse – the FCA has identified a complacent attitude amongst brokers when it comes to their obligations to prevent financial crime and detect market abuse. At the same time, the Regulator believes the risk faced by firms is inherently high, particularly for market abuse.
Hot on the heels of the Dear CEO letter, came the FCA’s report on Payment for Order Flow (PFOF). The report focused primarily on technical interpretations on the broking process, and the implications for PFOF resulting from different broking practices. The conclusion reached was that, while many firms have notionally stopped making PFOF, there are pockets of non-compliance, and a poor understanding of how PFOF may arise in certain trading scenarios.
None of the issues raised in either document are new – indeed many have been raised repeatedly by the FCA over the past five years or more. As such, there is a sense that the risk of regulatory censure for firms still failing to comply is rising.
If you’re a wholesale broker, you should have a look at your compliance controls as soon as possible to make sure you meet the FCA’s standards if they come calling.
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