CEO letter gives brokers six weeks to review controls

The FCA’s latest ‘Dear CEO’ letter warns wholesale brokers that risk management requires continual improvement in an increasingly risky market.  

The letter, sent on 11th January, details the FCA’s approach to supervision of wholesale broker firms in 2023 and beyond. Portfolio letter: Wholesale brokers 2023 follows the FCA’s latest review of the sector and how it has changed since its last review in 2019. While the letter reflects on ‘gradual improvement’ in conduct risks, it also suggests that wholesale broking firms are behind when it comes to stopping poor conduct and improving culture. Financial crime is seen as a particular area of weakness, and control functions in general are seen as inadequate.

The supervisory strategy is outlined in the context of greater market volatility since 2019 and significant changes to the economic environment last year. The regulator urges boards to consider heightened systemic risk and episodes of market stress in the coming months and years to model risk exposure accordingly.

The FCA makes clear its expectation that CEOs discuss the contents of the letter with directors and agree actions or next steps by the end of February.

Wholesale Broker Letter: Areas of focus

Financial resilience

The FCA observed that insufficient investment in risk management arrangements and expertise has led to firms in the sector underestimating and inadequately managing their exposure to liquidity risk and other associated risks. The letter reminds firms that adequate capital and liquidity are key controls in minimising disruption to the market and clients in the event of failure.

Although the letter acknowledges that the introduction of IFPR should go some way to addressing this issue it reminds firms to be prepared for the FCA to review and scrutinise their liquidity management controls and oversight arrangements.

Remuneration structures

The FCA continues to see issues with remuneration structures at wholesale brokers, despite previously voicing their concerns in 2019. In particular, it highlights remuneration structures in the sector based around lower base salaries with larger cash bonuses.

Again, IFPR should bring about positive change in this space – specifically via the MIFIDPRU Remuneration Code (SYSC 19G). The Remuneration Code has several key aspects to manage risk in this space – all of which come with an aim to promote accountability, discourage poor conduct, and mitigate short-term thinking and excessive risk taking.

The FCA confirms its supervisory work in this space will continue in 2023 with data gathering on industry wide practices and reviews of remuneration arrangements.

Governance and culture

The FCA reminds firms that boards and individuals with Senior Management Functions should have the skills and knowledge to comprehensively consider and challenge risks when making decisions.

The letter specifically highlights the risks of employing an individual where adverse information comes to light as part of the regulatory references process. Where firms choose to proceed with employment, the FCA makes it clear that it will have “little sympathy” with those who have not taken appropriate steps to introduce additional controls and oversight of the individual.

Control functions

To remain compliant with all relevant FCA rules, firms must ensure they have:

  • adequately resourced risk management and compliance functions
  • risk management and compliance functions that have influence at board level
  • controls to remain up to date with emerging risks that impact risk models and risk appetites
  • a culture that promotes adherence to the rules
  • appropriate policies and procedures that underpin the above.

The letter highlights the FCA’s concern regarding widespread deficiencies in wholesale broker’s controls for financial crime and market abuse mitigation. The FCA will continue its supervisory work in this space.

What wholesale brokers need to do

All firms are expected to have reviewed the letter, discussed it at director/board level, and to have agreed actions and/or next steps by the end of February 2023.

We can help

We regularly work with firms to ensure their governance arrangements and compliance framework are up to speed.

Our team of regulatory experts can help you understand and align your business to regulatory expectations, whether it is capital and liquidity requirements or remuneration arrangements under IFPR, financial crime, market abuse, or SM&CR.