Regulated funds updates - June 2020

In this update we summarise what the FCA's response to COVID-19 means for the wealth management sector

05 June 2020
London Financial District

FCA response to COVID-19

Date: 5 June 2020

By Ciara Davies

Megan Butler, the FCA’s Executive Director of Supervision (Investment, Wholesale and Specialists) delivered a speech on 4 June 2020, in which she highlighted the effects of COVID-19 on the financial sector and explained the FCA’s expectations of firms during this time.

Delivered at the Personal Investment Management & Financial Advice Association, Butler recognised that the industry has responded well and that overall firms were coping and adapting to a new normal.

The FCA has sought to provide guidance to firms to provide clarity on its expectations. In the wealth management and advice sector, Butler pointed to the Dear CEO letter published on 31 March, which provided further guidance on the 10 per cent devaluation reporting rule for discretionary managers. This requirement, mandated in MiFID II, has been challenging for firms and Butler states that the FCA intends to set out how it will supervise against this specific requirement until the end of September.

Butler also refers to the Business Plan, which sets out the five key drivers of the FCA’s response to coronavirus:

  • A good level of operational resilience
  • Understanding of firms’ financial resilience so that firms can fail in an orderly manner
  • Markets can function enabling price formation and orderly trading activity
  • Customers are treated fairly
  • Customers are aware of the risk of and protected from scams

In her speech, Butler focused on operational and financial resilience. Starting with operational resilience she highlighted the operational resilience consultation paper issued by the FCA, in late 2019. The proposals set out in the consultation paper, such as proposed requirements and expectations for firms and financial market infrastructure and the requirement for firms to set a tolerance for disruption for each important business service, are more relevant than ever.

Turning to financial resilience, Butler indicated that the FCA had seen significant downward pressure on may firms’ revenues due to COVID-19. To ensure that the FCA understands the effect COVID-19 is having on firms’ financial resilience, firms will have received a simple COVID-19 impact survey. Butler noted that financial pressures on firms could give rise to consumer harm, if firms looked to cut corners on governance or systems and controls. With some firms potentially exiting the market, the preservation of client assets and money is central to the FCA’s focus in the wealth management sector.

The outcomes that the FCA will focus on in the wealth management sector are that:

  • Firms must maintain adequate arrangements to protect client money and custody assets according to FCA requirements
  • Firms should provide suitable advice and discretionary investment decisions
  • Firms are still expected to act with integrity, this includes charging appropriate fees for services
  • Through adequate controls and governance, firms are expected to prevent financial crime and market abuse

Butler then turned to examples of the unacceptable conduct of some firms. For example, some firms have been caught pre-emptively setting up new entities and applying for authorisation before complaints and liabilities at their existing entities have crystallised, a practice known as lifeboating. A particularly egregious practice is that of financial advisers leaving financial advice firms that have run up liabilities through poor advice and then joining claims management firms to pursue claims against the advice those advisers had given. Butler says that the FCA has a clear message that these practices are completely unacceptable.

Butler concluded by discussing the future of regulation, especially in the context of an evolving financial services industry. There is a strong case for taking a step back and assessing whether the regulatory framework is delivering against more than just rules, but also against ultimate outcomes for users of financial services.

For further information, a copy of the speech can be found here.

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