On 24 January 2025, the FCA published a Dear CEO letter setting out its new strategy for supervising wholesale brokers.
The letter covers:
- Prudential risk management.
- Financial crime.
- Remuneration and broker misconduct.
- The FCA’s strategy for the next two years.
In relation to the FCA’s strategy for the next two years, the regulator has identified four strategic areas which will be the focus of its programme of proactive work. The FCA will use a combination of regulatory reporting data analysis, proactive outreach, and incisive testing to assess and mitigate risks of harm. The four strategic areas are:
- Broker conduct. The FCA will be conducting targeted work to assess how firms manage their brokers. It expects firms to have suitable controls in place to detect misconduct and to take appropriate action against those found to be committing misconduct. If the FCA identifies material weaknesses in the frameworks governing broker conduct, it will take actions which may include restrictions placed on individual firms or enforcement action against firms or individuals.
- Culture. The FCA will be using the results of its 2024 non-financial misconduct (NFM) survey for further proactive engagement with the portfolio, with a strong focus on the ‘outlier’ firms from the survey data. In particular, with respect to those outlier firms, the FCA will scrutinise (i) policies and procedures in place for reporting NFM concerns, including evidence of firms encouraging a good ‘speak up’ culture and giving staff confidence that they will be treated appropriately if they raise concerns, (ii) management of NFM cases by firms once they are reported by staff and (iii) processes for ensuring that fair outcomes are reached.
- Business oversight. The FCA intends to test firms’ frameworks comprehensively through its proactive work on broker conduct. Apart from the usual detective and monitoring controls, it will be particularly interested in the firms’ use of remuneration tools such as deferrals, clawback, or malus in cases of proven misconduct.
- Financial resilience. The FCA will focus on ensuring that firms which were subject to its liquidity review have acted on the feedback and implemented good practices. More broadly, the regulator will test wholesale brokers’ contingency funding plans and frameworks to assess whether firms’ plans are adequate for potential liquidity challenges caused by stress events. Overall, the FCA expects firms to review their levels of liquidity continuously to ensure that they comply with the Investment Firm Prudential Regime at all times. Where the FCA identifies material weaknesses, it is likely to impose additional capital and liquidity requirements.
CEOs of wholesale brokers are expected to discuss the contents of the letter with their Board, understand how the risks apply to their business and take action to manage those risks effectively.
The FCA expects this to happen by March 2025.