Corporate Finance Firms and Stockbrokers: FCA sets expectations

Corporate Finance Firms and Stockbrokers: FCA sets expectations

The latest flurry of Financial Conduct Authority (FCA) communications set out FCA expectations for corporate finance firms and stockbrokers. Updates from the UK regulator have been relentless of late. We look to summarise the key takeaways for busy professionals in the corporate finance and stockbroker sectors.

 

  1. Supervision Strategy for Corporate Finance Firms: Portfolio Letter

 

In a recent letter, the FCA outlined its supervisory strategy for the portfolio of around 500 Corporate Finance Firms (CFFs). Acknowledging the pivotal role these firms play in the UK economy, the FCA emphasised tailored approaches to address diverse business models. Key focal points include mitigating financial crime risks, preventing market abuse, ensuring consumer protection, and maintaining financial resilience.

Important issues:

  • CFFs incorrectly treating small businesses and local authorities as professional clients;
  • CFFs failing to adequately ensure that investors understand when they are being treated as a corporate finance contact (i.e. not the client) and when they are being treated as a client;
  • maintaining FCA permissions that are not used or needed which may lend credibility to unregulated activities misleading consumers;
  • poor market abuse controls e.g. ineffective information barriers, inadequate processes for the identification of inside information, poor wall crossing controls and incomplete or inaccurate insider lists;
  • incomplete and insufficiently detailed conflicts of interest registers, including failing to adequately document the conflict of director and staff shareholdings in corporate clients;
  • poor personal account dealing practices;
  • lack of robust financial crime due diligence and potential for sanctions breaches; and
  • weaknesses in financial resilience having the potential to harm consumers.

 

Self-assessment questions:

  • Do your firm’s contact details on Connect provide a current and actively monitored email address to receive and action FCA communications?
  • Do you have adequate oversight of the accuracy and completeness of RegData returns?
  • How effective is your firm’s approach to the creation and maintenance of insider lists, the maintenance of access logs, wall crossings, and the carrying out of market soundings?
  • Is your compliance department actively challenging, monitoring and escalating the firm’s issues relating to market abuse, conflicts of interest and personal account dealing?
  • Can you explain your process for identifying the source of funds when dealing with complex client structures?
  • How do you ensure the adequacy of your financial crime systems and controls including sanctions screening?
  • Can you evidence that your board of directors has discussed this Dear CEO letter and agreed appropriate actions and next steps?

 

  1. Dear CEO letter: FCA expectations for wealth management & stockbroking firms

 

This letter outlines the FCA’s evaluation of the wealth management and stockbroking sector, emphasising two primary concerns: (i) preventing financial crime; and (ii) meeting Consumer Duty outcomes. Acknowledging the sector’s potential value in helping clients navigate financial goals, the FCA points out significant issues such as consumer losses to scams, money laundering facilitation, and the provision of poor-value products. With 1.8 million portfolios and 14.3 million stockbroking accounts, the sector poses substantial risks due to the scale of assets under management.

The FCA calls on industry leaders to address root causes, often linked to ineffective leadership, governance, and controls. The UK regulator plans more short-notice and unannounced visits, and increased use of intervention powers for severe cases. The overarching goal is to reduce harm, elevate standards, and enhance the sector’s reputation through joint initiatives, recognising the collective strength in combating financial crime.

Summary of FCA expectations:

Financial Crime

  • Prevent financial crime
  • Enhance KYC
  • Train staff to identify & report
  • Improve systems & controls
  • Recruit experienced & independent
  • SMF 16/17s

Consumer Duty

  • Align to customer needs
  • Assess vulnerability
  • Ensure customer understanding
  • Justify complex or risky investments
  • Regularly assess charges & change when poor value

 

Self-assessment questions

  • Can you clearly articulate the financial crime risks faced by your firm?
  • When was the last time you obtained an independent review of your systems and controls to counter financial crime and money laundering?
  • Does the firm periodically assess that individual(s) performing SMF16 & SMF17 roles have the required experience, skills, and independence to perform those functions?
  • Are escalation procedures clearly documented?
  • Can you demonstrate how the firm has implemented the FCA Financial Crime Guide?
  • How do you ensure your products and services remain aligned to your consumer’s needs, risk profile and circumstances?
  • Are you doing enough to identify vulnerable customers (49% of portfolio managers and 69% of stockbrokers from the wealth data survey who identified no vulnerable consumers, even though 50% of us will be classified as vulnerable over our lifetime)?
  • How are you testing that your consumers fully understand all aspects of your investment products and services, including any limitations to the Financial Ombudsman/FSCS consumer protection status and associated risks of investments?
  • Have you got robust processes around uprating clients from retail to professional and do you periodically test the effectiveness of your client categorisation controls?
  • Can you demonstrate that your firm regularly assesses the overall cost and value for money of your products and services, making changes when poor value is identified?

 

  1. Market Watch 75 | FCA

 

In the 75th edition of the FCA Market Watch newsletter, the UK regulator outlines steps for minimising the risk of insider dealing and unlawful disclosure involving market soundings. It identifies deficiencies in the systems and controls of disclosing market participants (DMPs) and market sounding recipients (MSRs) within the market soundings regime. The FCA reports that these weaknesses enabled MSRs to uncover transaction details and the identities of financial instruments, as well as trade in relevant financial instruments. Typically, this occurred after an initial communication from a DMP or a request for MSR consent to participate in a market sounding.

Key takeaways:

  • MSRs should consider putting in place the ‘Gatekeeper’ arrangements highlighted in Market Watch 51 and 58;
  • take extra care when conducting market soundings on financial instruments where recipients may possess external information that could reasonably identify the relevant financial instrument;
  • be aware of the potential risk of unlawfully disclosing inside information while communicating with recipients and obtaining their consent for market soundings and inside information;
  • evaluate whether the information provided is crucial for recipients to make an informed decision about receiving the information;
  • consider specific arrangements and scripts where the recipient is a private individual who will tend to be less sophisticated or less aware of potential breaches than corporate clients;
  • review the standardised information intended for market sounding recipients in initial communications and consent requests;
  • ensure that staff handling market soundings are adequately trained in internal procedures and the regulatory framework of the Market Abuse Regulation (MAR) concerning the unlawful use of inside information;
  • minimise the time intervals between initial communications, consent requests, and recipients’ approval to reduce the risk of insider dealing in cases of delayed responses; and
  • detail the current systems and controls in place to guarantee the firm’s adherence to the Market Abuse Regulation (UK MAR) market soundings regime.

 

Self-assessment questions:

  • To what extent are your procedures documented?
  • How do you monitor for unlawful disclosure of inside information via market soundings?

 

How C&G can help

We are well placed to assist firms with their compliance framework. We offer ongoing advice, health checks on existing controls, policy drafting and bespoke training solutions to firms and venues. Contact us with your requirements if you need assistance in this area.

Lewis Gurry

Lewis Gurry

Lewis Gurry

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