FCA letter highlights risks in UK wealth management industry

The letter is aimed at firms that manage portfolios, provide retail-focused stockbroking services, operate as a private bank or provide outsourced services to wealth managers. It emphasises the need for them to understand their financial crime risks, reminding them of cases in which firms in the sector have lost their clients significant sums to scams and fraud or have enabled laundering of the assets of illegitimate clients.

The amount of assets under management combined with the seriousness of the dangers make this one of the higher-risk sectors of financial service firms in the FCA's jurisdiction, it says. 'We expect your firm to not knowingly or otherwise engage or facilitate frauds, scams, or money laundering; understand your financial crime risks by identifying who your clients are, including their expected transaction patterns and corporate structure; not carry out tick box compliance exercises or outsource responsibility to third parties; and ensure you have robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way.'

The letter also notes that consumers have been exposed to inappropriately high-risk or complex investments and have sometimes been advised to invest in poor-value products and services. Firms should not uprate their clients from retail to professional status unless this decision is supported by robust systems and controls, given the loss of protections, the FCA notes. They should also change poor pricing practices where they exist. The FCA also says it has encountered situations where portfolio managers have taken advantage of established relationships with clients to obscure risks of unsuitable portfolios that are not aligned to the client's risk profile.

It further focuses on firms' actions on the new consumer duty that came into force on 31 July 2023, singling out particular failings in respect of the duty's four specified outcome measures. These include, among other things, the promotion or selling of products or services that are too high-risk or complex for most consumers, inadequate assessments of client vulnerability and unclear disclosures on fees and charging structures.

Law firm Osborne Clarke notes that the tone of the letter shows that ‘the FCA intends to be very robust in its supervision of firms in this area (and enforcement against such firms, where it considers this action appropriate).’

'We recommend firms’ CEOs take action now to ensure that their relevant committees are responsible for reviewing each of the areas highlighted in the letter, ensuring that there are no gaps between the firm's practices and the FCA’s expectations', comments law firm Macfarlanes.

Sources

• FCA (PDF)
• Osborne Clarke
• Macfarlanes
• Burges Salmon