UK Financial Conduct Authority portfolio letter on supervisory strategy for wholesale brokers

The U.K. Financial Conduct Authority has published a Dear CEO Letter on its new strategy for supervising wholesale brokers. The FCA has observed a change in the sector in recent years with larger firms acquiring smaller ones and some weaker firms exiting the market altogether, although it observes the sector is overall healthy and competitive.

The FCA notes that improvements have been made on prudential risk management following its focus on the issue over the previous two years and plans to publish an observation paper on good and poor practices shortly. On financial crime, the FCA has seen improvements in areas such as risk assessment processes and oversight frameworks but is concerned that firms are underestimating their money laundering risks. It expects firms to read its publication, Money laundering through the markets, incorporate good practices and stop poor practices where relevant. It continues to observe an inconsistent application of the Remuneration Code across firms and will use regulatory tools (including imposition of capital requirements) for firms it has identified as being at fault.

Over the next two years, its four strategic areas of focus will be: (i) broker conduct, including how firms manage their brokers. It expects firms to have suitable controls in place to detect misconduct and will take enforcement action if material weaknesses in the frameworks governing broker conduct are identified; (ii) culture - the FCA will use the results of its 2024 non-financial misconduct survey to engage with firms, focusing on outliers. In particular, it will scrutinize outlier firms' policies and procedures for reporting NFM concerns, their management of NFM cases reported by staff and their processes for ensuring fair outcomes are reached; (iii) business oversight - the FCA plans to test firms' frameworks and will be particularly interested in firms' use of remuneration tools (such as deferrals, clawback or malus) in cases of proven misconduct; and (iv) financial resilience – the FCA will ensure that firms subject to its liquidity review have acted on the feedback and implemented good practices and will test firms' contingency funding plans and frameworks. Where material weaknesses are identified, the FCA is likely to impose additional capital and liquidity requirements.

The FCA expects CEOs to have discussed the letter with their fellow directors and boards, and to have agreed actions and next steps where necessary, by the end of March.

Return to main website.