When a headteacher writes to a parent or guardian about the poor behaviour of their child, they will generally act.
In much the same way, when a regulator shows its teeth, it tends to make firms listen.
When I used to write for a utility publication the regulators (particularly the water regulator Ofwat) were often – rightly or wrongly – berated by the nationals for not being tough enough. They were accused of letting the “fat cat” bosses take huge salaries while polluting rivers or letting energy prices run amok.
There were times, though, when the regulators would shock the sector by taking a strong stance. I remember one such time in 2019 when Ofwat released its assessment of how good water companies’ business plans were for the five years forward. No firm made it into the ‘exceptional’ category.
The regulator was expected to be strict, but its level of austerity shocked firms into improvement.
Like Ofwat, the Financial Conduct Authority is a principles-based regulator and, as such, uses high-level, broadly stated rules or principles to set the standards by which regulated firms must conduct business. It is often criticised for not doing enough to crack down on badly-behaved firms.
But last week, the regulator took a swing at wealth managers, warning them that its supervision will become “more targeted, intrusive and assertive”.
In a Dear CEO letter which gives some serious Don Corleone vibes, the regulator says it will conduct more short notice and unannounced visits where it “deems it appropriate”. And it added it is “significantly increasing” the use of its formal intervention powers for the worst cases.
Its key concerns centre on financial crime which has been both enabled and carried out by certain firms in the sector.
The regulator tells wealth managers and stockbrokers that firms in their sector have “lost consumers significant sums to scams and fraud, and have enabled money laundering, causing significant negative economic, market and social damage”.
They have also apparently “exposed consumers to inappropriately high-risk or complex investments and provided consumers with poor-value products and services”.
There have been some high-profile cases of fraud which have damaged trust in the sector.
The regulator says it has seen firms launder the assets of illegitimate clients, knowingly or unknowingly, through “greed or incompetence”.
It has also seen other firms “squander or even steal” the assets of legitimate clients through fraud and scams.
In the letter, FCA director for consumer investments Lucy Castledine sets out the regulator’s expectations for firms.
For law-abiding citizens, the first few seem obvious.
They must not knowingly or otherwise engage or facilitate frauds, scams, or money laundering and understand their financial crime risks by identifying who their clients are, including those clients’ expected transaction patterns and corporate structure.
And there is something in there for firms which may not knowingly commit fraud but could unwittingly allow it to happen.
They must also not carry out tick-box compliance exercises or outsource responsibility to third parties, and they must ensure they have robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way.
Firms must also ensure their senior management function holders have the required experience, skills, and independence, and share and report information about wrongdoing with the FCA or relevant law enforcement agencies immediately.
Finally, the regulator says, firms must read and fully implement its Financial Crime Guide and Financial Crime Thematic Reviews, which outline the steps firms must take to defend against financial crime.
The letter makes substantial reference to the Consumer Duty, which came into effect on 31 July this year.
John Cowan: Think Consumer Duty pressure is over? It’s only just getting started
The FCA says many wealth managers and stockbrokers have “failed to meet their obligations” to provide a service that delivers good consumer outcomes.
One particularly pertinent point the regulator makes is about price and value. It says it continues to see firms “charging for services which are not delivered”, such as ongoing advice, overtrading on portfolios to generate high transaction fees and providing a product or service which does not align with the needs of consumers, such as an expensive discretionary offering for a low-risk consumer.
The FCA also says it is concerned that firms are “not consistently providing clear disclosures on their fees or charging structures”.
“As a result, consumers can be unaware of high fees that significantly reduce their investment returns. In particular, we have seen firms charge high average fees and charge particular individuals very high fees,” it says, warning that it will “challenge firms” to justify such high charges.
Even St James’s Place (SJP) has said it will scrap exit fees for new clients. I am not going to get into the intricacies of that particular announcement. You can read all about it in former editor Katey Pigden’s cover feature here.
Just telling firms not to act badly in a letter will not be enough to cut out fraud and scams, or ensure consumers and clients are charged fair prices and receive value for money. Actions will speak louder than words.
But the regulator has thrown down the gauntlet, and it is now up to companies how they respond.
