The FCA recently released its Sector Views report, a summary of its findings on each sector - areas of investor harm, drivers of change and how each sector is changing. It provides an insight into areas of concern for the regulator and consequently, where new regulations and/or supervision work may be issued and undertaken.
Below, we summarise the FCAs comments into the retail investments sector which covers investment advice and ex-only retail investment products.
Principal areas of concern
1. High-Risk products being sold to retail clients
The FCA continues to be concerned about high risk products being sold to mainstream retail clients. The concern is understandable. The FCA estimates 78% of active retail clients lose money trading CFDs. There have also been well publicised losses arising from retail clients trading speculative mini-bonds. We can expect more product interventions and information requests of firms who advise on, arrange or execute these products for clients.
2. Availability and Quality of Advice
The FCA has also expressed concern about the availability and quality of the advice provided to clients. Research shows that more customers are seeking advice, however the advice can sometimes be unsuitable.
3. Financial Crime
The FCA have identified Money Laundering and fraud as high risk areas for retail clients. Action Fraud reported £197m losses due to investment scams in 2018. Firms will therefore be expected to take reasonable steps to protect clients from scams and ensure robust money laundering prevention systems and controls.
The barriers to switching platforms by clients remains a concern. Though most retail clients who use platforms report being sensitive to charges. Yet, not many switch due to the time delays, complexity of the process, exit fees, and ignorance of what the platform charges are.
Future proofing your business
To ensure that the systems and controls; and activities of your firm remain aligned with the FCA’s objectives, we would recommend the following actions for management teams:
1. Review your Risk Registers
For many firms serving retail clients by manufacturing or distributing retail investment products, we strongly recommend a review of your risk registers. The FCA has embraced the principle of outcome-based regulation. Senior management teams should review their risks, particularly operational risks, and ensure risks are appropriately assessed and suitable mitigation controls designed. This in many ways will demonstrate reasonable steps under the Senior Managers and Certification Regime.
2. Review your product governance arrangements
The requirements under MIFID II for product governance were strengthened. Firms- manufacturers and distributors- are expected to take steps to satisfy themselves that products are going to the right target market, that the negative target market for each product is clearly defined. A periodic review is recommended, and steps taken to remedy any management information that indicates a change in distribution strategy or product details may be required. Financial promotions controls must also be strengthened with ongoing training provided to individuals responsible for the production and distribution of these materials
3. Financial Crime Risk Assessments
Introduced by the Money laundering Regulations 2017, firms are required to carry out periodic assessments of the financial crime risks they face and take steps to prevent them. The focus of financial crime prevention in recent times has been more strongly around the subject of risk assessments. And these need to be documented. Frequent reminders to staff and clients as well about the steps to be taken to prevent fraud will also help demonstrate reasonable steps. For example, sales staff should be regularly trained on their role in ensuring the protection of personal data; clients should often be reminded to keep passwords safe, systems should incorporate 2-factor authentication, etc.
4. Due Diligence
Firms must incorporate robust due diligence on the counterparties they deal with. Brokerages, for example, should ensure money managers have the right permissions or exemptions, advisory firms should regularly review their suitability assessment criteria. Firms should regularly update their due diligence on third parties providing support services such as client onboarding or reporting. Operational resilience is a key theme of the FCA’s current focus.
In a low interest rate environment, retail investors are likely to continue to seek high return products without a proper understanding of the risks they are taking on. However, by taking steps to ensure proper risk disclosures, robust financial crime prevention controls, appropriate due diligence on third parties in the distribution and value chains, firms may be confident of their business being aligned with the FCA’s objectives.
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