In a recent speech, the FCA’s Executive Director of Supervision – Investment, Wholesale and Specialists, Megan Butler set out some helpful guidance as to the FCA’s expectations of the wealth management and advice industry, as firms transition from immediate crisis response to adapting to meet the long-term impacts of COVID-19.
Ms Butler focused on two FCA priority areas: operational and financial resilience.
Operational Resilience: The FCA expects all firms to have contingency plans to deal with major events and that these plans have been properly tested. Firms should review the FCA's operational resilience consultation paper which sets out the FCA’s proposals for firms to strengthen their resilience so as to be able to supply their most important services with minimal interruption, even during severe operational events. The main points from the consultation paper are:
- The proposed requirements and expectations for firms and financial market infrastructure to identify their important business services.
- That firms must set a tolerance for disruption for each important business service and ensure they can continue to deliver their important business services. They must ensure they are able to remain within their impact tolerances during severe but plausible scenarios.
- The requirements to map and test important business services to identify vulnerabilities in their operational resilience and make changes where needed.
Ms Butler observed that firms need to keep their focus on operational resilience as circumstances change, government guidance is updated and, as things return to some form of ‘new normal’, how those changes will affect their resilience and their services.
Financial resilience (including preservation of client assets and money):
The FCA is beginning to see the impact of the crisis in its significant downward pressure on many firms’ revenues and notes that financial viability concerns already present in some firms will be amplified and otherwise financially sound firms may become vulnerable. The FCA has issued a survey to firms to assist it in assessing the impact of the COVID-19 crisis on firms’ financial resilience.
Ms Butler noted that financial pressure could lead to harm to customers if firms “cut corners” on governance or systems and controls as this could result in increased likelihood of financial crime, market abuse, poor record keeping and unsuitable advice and investment decisions.
The regulator acknowledged that some firms holding client money and custody assets may need to exit the market. In these cases it is crucial that they minimise delay in the return of client money and custody assets and take action ahead of time to prevent shortfalls in what should be held on behalf of clients.
Ms Butler said that the FCA wants firms to take consumer and market outcomes into greater account when designing and delivering services. To assist firms in doing this, the FCA will seek to be clearer with firms as to the outcomes it expects to them to achieve and how it is targeting its own work. Ms Butler also reminded firms of the outcomes that the regulator continues to pursue in the wealth management sector:
- Firms must maintain adequate arrangements to protect client money and custody assets in accordance with the FCA requirements. The FCA understands that some firms are reporting an increase in client money balances during the crisis. Firms are required to consider their clients’ best interests and pursuant to this, the FCA expects firms to return balances which are unlikely to be reinvested in the short term. The FCA is reviewing the financial positions of firms to identify those that might be vulnerable to failure and ensure they have appropriate plans to achieve an orderly wind-down if required.
- Firms must provide suitable advice and discretionary investment decisions.
- Firms must act with integrity (which includes charging appropriate fees for services delivered and prevention of fraud). The FCA has identified some firms which have tried to avoid their liabilities to customers by closing down companies and setting up new ones. These practices are unacceptable, and the FCA will take action against firms conducting such activities.
- Firms must prevent financial crime and market abuse through adequate controls and governance
It is apparent that the regulator expects firms to focus on the future and while acknowledging the challenging environment, the regulatory expectations are largely unchanged. The FCA will use its full toolkit of powers and tools to achieve its desired outcomes and is striving to think innovatively about how it can regulate to best meet its objectives. It will build on the lessons learned from the current crisis and expect the industry to do the same.
I think it is fair to say that whilst we as an industry will work together to get through, and manage the effects of, coronavirus – as the regulator we will take action where we see bad practices.