The FCA’s approach to supervising wealth management and private banking firms

Published: 02/07/2013   Last Modified : 18/07/2013 / Author: Clive Adamson
Speech by Clive Adamson, Director of Supervision, the FCA, at the APCIMS Compliance Conference, London. This is the text of the speech as drafted, which may differ from the delivered version.

Introduction

Good afternoon and many thanks to APCIMS for inviting me to speak. I am extremely pleased to be here today as we continue our ongoing dialogue with APCIMS to set the agenda for the Wealth Management industry. Today, I will be talking to you about the Financial Conduct Authority, the FCA, and our approach to supervision, with specific emphasis on the Wealth Management and Private Banking sector.

We are now almost 100 days into the formal creation of the FCA and I hope that you are starting to see how different financial services regulation will be going forward. We all recognise that trust in the financial services industry is at an all-time low. But we believe that by doing our job effectively, we will play a part in rebuilding the trust that is needed for consumers, firms and the economy at large.

So, if I had to sum up the key characteristics of the FCA, I would say three things:

  • judgement based
  • forward-looking, and
  • outcome focused.

These three points summarise our approach to financial regulation, and give you a clear sense of our purpose for your own area of business. But let me explain a little more what these mean for us.

To be judgement-based means we need a deeper understanding of the sectors we regulate and what consumers are really experiencing. We will be curious to understand how a firm makes its money, how its business model delivers versus the expectations of a firm’s customer base, what the product experience feels like in practice, and whether the culture in the firm reflects the values that senior management set out.  

To be forward-looking doesn’t mean we are able to predict the future or anticipate every issue that’s likely to arise. What it means is that we are more focused on the big issues that matter, use more data and intelligence to draw conclusions about firms or the markets they operate in, and join the dots to identify and head off risks before they crystallise and cause consumer detriment or damage market integrity.

This leads me to outcome-focused. What this means is that we will be focused on what outcomes are being achieved for customers rather than a narrow focus on whether a firm complies with our rules.  

Pivotal to this approach is our engagement with firms, consumers and trade bodies, such as APCIMS, which has significantly increased over the past few months. This recognises that these three groups are both important stakeholders and an important source of market intelligence and will help us deliver our objectives.

All of these statements are easy to say but hard to deliver in practice, as I’m sure you will appreciate. But it is important to understand why these things are important to us, and for that I’ll take you back to our objectives.  

Our strategic objective, our goal or aim if you like, is to make sure that markets work well. Everything we do leads back to this, while our operational objectives of protecting consumers, enhancing market integrity and promoting effective competition, take it to the next level of detail. We are clear that when you put these together, they give the FCA a very clear mandate to make sure markets work well for consumers, of all shapes and sizes, for firms and in the public interest.

So although we are almost 100 days in, we are very clear in our purpose, sharp in our focus and committed to delivering all three of our objectives.  

Supervision of Wealth Management and Private Banking firms

I said at the start that I would talk about how our supervision approach and how it applies to Wealth Management and Private Banking firms.

Firstly, we are putting into place a new supervision model that in essence focuses on ensuring firms put the interests of the customer and market integrity at the heart of how they run their business. This will be done by a continuation of individual firm risk assessments, dealing with events that may crystallise as detriment and more thematic reviews. These, however, will feel different from the past in four main respects:

  • Firstly, our firm risk assessments will be focused more on looking at the business models of firms, strategies, culture and front-line processes rather than our traditional approach of focusing on controls.
  • Essentially, it is a shift from looking at how a firm controls itself to how it runs itself. The reason for this is that we believe these areas are some of the primary drivers of poor behaviours.
  • Secondly, we have placed additional resource into thematic reviews as the most effective way of delivering our conduct priorities and we will be more transparent about what we are interested in before we start our work.
  • Thirdly, we have changed our internal structure to align with this new approach. We have put in place sector-focused departments that are more clearly aligned with a whole industry. And within the new Long-Term Savings & Pensions Division, we are in the final stages of setting up a new Wealth Management and Private Banking Department, due to go live on 15 July. I hope you will welcome this.
  • Finally, and to enable all this to happen, we are changing our mindset from a primarily reactive to more pre-emptive when we identify issues; be less tick-box and use more judgement; focus less on the minutiae and more on the big issues affecting firms and sectors; and be more orientated towards firms doing the right thing instead of just monitoring compliance with rules.

Before I move on, it is worth noting that the biggest wealth managers, which are nearly all part of wider banking groups, will continue to be supervised by their group supervisors, who will now be supported by colleagues in this new Wealth Management & Private Banking Department. All other firms in scope will move across to be supervised directly by the new department, with smaller firms being handled through our Firm Contact Centre.

The Wealth Management and Private Banking industry and our thematic review

I would like to now say a few words about your industry and then I’ll turn my attention to a recent piece of thematic work we undertook.

The UK Wealth Management and Private Banking industry plays a vital role in delivering financial services to consumers and is recognised as world-leading. In the UK, it is a major contributor to the economy, responsible for the employment of in excess of 120,000 individuals and with over £2 trillion of assets under management.

Overall, we want to support the growth of this industry, given its importance to the economy and the simple fact that we all, affluent or not, need to save for retirement. However, we do see some challenges in the sector, such as:

  • The adaptation of firms to the new regulatory framework, including the implementation of the Retail Distribution Review, which has resulted in many making adjustments to their business models, as well as having to meet the growing number of European directives; and
  • The increased competition facing firms as more expand into this space, resulting in existing players needing to be clear about their value proposition.
  • The need to adapt to the higher standard regulators globally are looking for in relation to ensuring customers’ wealth is legitimately acquired.

In terms of the work we have done in this sector, I would highlight the preparation for the RDR, ensuring firms adequately manage money laundering risks, and safeguarding the integrity of client assets. All of which have been widely publicised over the past few months.

Additionally, and as many of you will know, we also conducted two pieces of thematic work in this sector. The first, in Autumn 2010, involved reviewing a number of retail client investment portfolios in 16 wealth management firms. What we discovered then was a range of widespread issues, with most firms in our sample unable to demonstrate the suitability of their customers’ investment portfolios, either because of the lack of client information on file, or because the portfolios did not appear to match customers’ investment objectives or appetite for risk. There was relatively little actual detriment at this point. We published the results of that review in June 2011, through a Dear CEO letter, and asked CEOs to review our findings and consider the implications for their firms.

The results of the first phase of thematic work meant that we decided to conduct a second phase of work last year and focused on six UK retail banks, given that a number of these have or were planning to have substantial Wealth Management offerings. Our teams interviewed a range of individuals including senior management, front and back office staff, as well as conducting our own file reviews to assess the judgements firms themselves were making on investment suitability.

Firms had made improvements, including in how new clients are taken on, and we believe that this is mainly moving in the right direction. However, and recognising this is a journey, firms need to continue raising their standards to be able to demonstrate that they are providing their customers with managed investment portfolios that are right for their needs and circumstances.

Disappointingly, we still found a number of cases where suitability could not be determined or there was a high risk of unsuitability, and some firms’ descriptions of their Wealth Management offerings may have led customers to misunderstand the service they were receiving.

We have been working with firms included in the review to ensure they undertake suitable remedial action in response to the concerns we have identified. Four firms are already carrying out some form of remediation, including undertaking past business reviews to identify customers who have held unsuitable investment portfolios and offer redress where required, and two firms have appointed independent third parties to review and provide reports to us on certain matters of concern.

None of these findings mean that consumers have been subject to widespread detriment. However, we know only too well that markets can go down as well as up, so there is a real danger of detriment if these issues are not addressed.  We need firms to stay focussed on delivering the right outcomes for their consumers, treating them fairly and creating a culture that delivers those things.

So where next for us?

As I mentioned earlier, we are in the final stages of setting up a Wealth Management and Private Banking Department at the FCA in order to provide an area of expertise for this important sector. In time, we will also conduct further thematic work in this space. But pending that and given the complexities of the businesses operating within this industry, we believe that firms should focus on a number of key areas. These are:

  • Firms should consider their oversight arrangements to ensure they are suitable for the nature, size and complexity of the firms in question.
  • Firms should record and keep up-to-date consumer information in order to ensure their individual portfolios continue to be suitable for them. We expect firms to make every effort to keep this information current and relevant.
  • Firms should identify and manage conflicts of interest. We want to see that you have thoroughly considered any potential conflicts of interest and will look, for example, at how many in-house products or products manufactured by an associate of the firm are held within individual portfolios – questioning whether this is right for the customer.
  • Firms must deliver the services customers have signed up for, agreeing upfront the exact nature of the service they will provide and how the customer will pay for this – ensuring it is recorded in the client agreement signed at the start of the business relationship.
  • Firms should ensure that their customers’ wealth is legitimately acquired. It is important firms have a culture based on integrity and ethical values, combined with effective anti-money laundering controls and anti-bribery and corruption processes to prevent their businesses from being used for the purposes of financial crime.
  • Firms should ensure portfolios are consistent with customer objectives. It is important to explore and record your customer’s attitude to risk and fully understand how they want to invest their money. Where we find that your records are unclear, we will question why.
  • And finally, firms should clearly set out their periodic reports. These provide vital information to customers with discretionary accounts and without them, they cannot judge how well their investments are being managed, whether they are performing in line with their expectations, or if they getting value for money. So we expect reports to be clear, use appropriate benchmarks and adequately disclose relevant fees.

Summary

I hope you found my talk today helpful. Fundamentally, we want all firms to think about their own business models and the way they do business to ensure that the interests of customer and market integrity is genuinely at the heart of how they run their businesses, and this is supported by a strong culture to deliver this. We want senior management to set a strong tone from the top, translate this into easily understood business practices, and support the right behaviours through performance management, employee development, and reinforcing through reward programmes.

But we’re realistic about the task ahead and recognise that this will be a journey – not just for us, but for the entire financial services industry. So we will continue to listen and engage with you and through trade bodies, including APCIMS, so that we can be in the best possible position to act early, to use our judgement on emerging issues and to keep an eye on the long-term benefits and outcomes for consumers and market.

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