Regulatory Reminder: FCA Portfolio Letter to Wholesale Brokers

Posted on: 9 February 2023

Written by: Hamza Idrees

On 11 January 2023, the FCA published a letter addressed to CEOs of wholesale brokers. The letter outlined the important risks arising from wholesale brokers' business activities, the driving factors behind those risks, and the supervisory focus for the next two years.

It is likely that there will be heightened systemic risk and periods of stress in markets such as energy, metal, and government bonds. In addition, overarching macroeconomic factors including, soaring inflation, increased interest rates, and preparation for a likely recession have changed the market structure. Firms were encouraged to assess their exposure to the current market conditions and mitigate risks where possible. Based on recent supervisory work, the FCA has identified four key areas of focus relevant to wholesale brokering firms:

1. Financial resilience

The FCA is concerned about how brokers are managing their liquidity risk. Turbulent markets mean that firms are more susceptible to liquidity risks crystallising, especially with the unpredictability of commodity markets. Firms are expected to be familiar with and review the level of liquidity that they hold under the Investment Firm Prudential Regime (“IFPR”) to ensure adequate assessments in proportion to the risks they are exposed to. The FCA is prepared to intervene by way of restrictions and Board reviews, where it sees weaknesses in liquidity requirements or firms underestimating this component. In addition, firms should stress test based on extreme events or reverse stress scenarios, to highlight any deficiencies and to determine what could be done to reduce vulnerability in those events. Moreover, on both financial and operational matters, firms should remember that many market stresses will include a systemic event rather than an idiosyncratic one, and they should consider a feedback loop with other participants as a matter of course.

2. Remuneration structures

The issue of receiving bonuses at the expense of acting in the client’s best interest remains. Senior management and boards of wholesale brokers are expected to ensure that their remuneration structures comply with the IPFRU remuneration requirements, specifically the MIDIFPRU Remuneration Code (SYSC19G). Where firms have failed to evidence that they have taken steps to comply with the remuneration requirements, the FCA can penalise the firm by imposing additional capital requirements, to account for the increased risk that weak incentives can drive.

3. Governance and culture

Having a board composed of competent and skilled members is imperative to instilling a healthy firm culture. Poor systematic failures are attributable to the wrong management team being unable to solve issues. Therefore, firms should ensure they follow the Senior Managers and Certification Regime (“SMCR”) to promote good decision-making and accountability. Members holding any Senior Management Functions ("SMFs") must be properly assessed to determine adequate and appropriate skillset, relevant for the role. 

4. Control functions

Firms are expected to comply with all relevant FCA rules that are applicable to them. Financial crime risks and market abuse remain an area where brokers are typically found to have underdeveloped policy and procedure frameworks to effectively mitigate risks. Firms should continue to review internal compliance infrastructure and highlight areas that require attention, to make changes that comply with the FCA rules.

Firms’ requirements following the letter…

As an SMCR duty requirement, the FCA expects CEOs of broker firms to discuss the points outlined in its letter and how the risks may be associated with their firms, along with actions and/or next steps to mitigate and manage them effectively with their directors and/or Board. The deadline for doing this is the end of February 2023. If firms are facing issues of strategic importance, firms should contact the Manager of the Wholesale Brokers Flexible Supervision Team, Ulla Suomio at [email protected] or call 0300 500 0597.

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