At the start of the summer, the FCA wrote to wealth managers (on 13 June) by way of a Dear CEO letter The letter highlighted the key risks that wealth management and stockbroking firms pose to their customers or the markets in which they operate. The FCA is asking firms to consider whether they present these risks and, if so, for them to consider ways to mitigate these. The letter forms part of a 2-year strategy (which began in April this year) - after which time, the FCA will write to firms with their updated view of the key sector risks and their updated supervisory focus. (https://www.fca.org.uk/publication/correspondence/portfolio-letter-wealth-managers-stockbrokers.pdf ).
Key types of harm posed by wealth managers
- Clients having reduced levels of savings and investments due to fraud, investment scams and inadequate client money or asset controls
- Clients losing confidence in the industry's ability to deliver their financial objectives due to mismanagement of conflicts of interest and market abuse
- Reduced levels of savings and investments due to order handling procedures and execution processes that do not deliver best outcomes
- Clients being unable to understand the costs of services provided by firms due to insufficient or inaccurate disclosure of costs and charges
Best execution concerns
As a reminder, under COBS 11.2 firms must take all sufficient steps to obtain the best possible result for its clients when executing client orders or passing them to other firms for execution.
The FCA's Investment Platforms Market Study (published in March this year) highlighted specific issues and weaknesses in order handling procedures and best execution evaluations. The FCA were particularly concerned with the Retail Service Provider (RSP) trade execution system – through which only 80% of orders were found to receive a price at least as good as the best available – although the best execution requirement depends on a variety of execution factors (including price, costs, speed, likelihood of execution), the FCA's primary concern is value for money for clients.
Requirements for wealth managers
The FCA has stated that firms are expected to have:
- Effective day to day execution processes;
- Contingent arrangements for periods of market distress; and
- Clear comprehensive and effective oversight and monitoring arrangements.
Firms need to consider their best execution arrangements (particularly if they rely on a single RSP or market maker) and have systems in place in times of market distress so that if their RSP system is unavailable, they have an alternative. Firms should have more than one means of executing or transmitting orders – for example, being able to move from electronic to voice broking when necessary may be appropriate for certain types of instrument.
The requirement to meet the level of having taken "all sufficient steps" to obtain the best possible result for clients requires, in the FCA's view, robust monitoring.
As such, firms should consider who is monitoring whether best execution is being achieved – if it is a third party system – are they using adequate sample sizes? And how wide are their tolerances to price variation?
The FCA has warned that it may consider supervision work in this area.
Therefore, asset managers should be reviewing their best execution procedures and scrutinising their list of brokers on an annual basis. Have they always achieved the best price? If not, was there a reason for this – i.e. was another execution factor given more weight and was this decision justified? Have there been issues with filling orders? Monitoring should also be undertaken on an ongoing basis. If the firm has concerns with a particular broker, it should seriously consider changing brokers.
All monitoring should of course be recorded to demonstrate good governance.
Best execution has been a requirement on firms for many years but clearly the FCA is concerned that firms are still not managing to achieve best execution for their clients on a consistent basis. Firms should review their procedures in light of the letter and implement any changes necessary to put them in a good position should the FCA decide supervisory action is indeed required.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.