The Financial Conduct Authority has warned wealth managers they must have a plan for what to do if their firm fails, after it found an increase in the number of loss-making firms during the pandemic.
In a 'Dear CEO' letter released today (September 30), the regulator said the pandemic-induced market volatility had resulted in revenue fluctuations, which many firms had weathered but many were still failing.
It said firms must have a good understanding of their regulatory capital and reporting requirements to minimise any risk to their clients.
In the event of a failure the regulator said it expects firms to have a “credible” wind down plan that includes appropriate and timely triggers for implementation, as well as a realistic time frame and estimate of costs for the wind down.
It said: “We are concerned that in the event of disorderly firm failure, there is a risk of harm to consumers.
“This includes through the loss of, or disruption to, access to, client assets.
"Your firm must have a good understanding of its regulatory capital and reporting requirements.
"Your firm should undertake regular reviews of the adequacy of its capital and liquidity to ensure that it maintains adequate
resources for its future needs."
It added if a firm identifies emerging liquidity or capital risks in its business, the regulator expects to be proactively notified at an early stage so that it can help to minimise consumer harm.
The FCA also warned CEOs they must understand the Investment Firm Prudential Regime (IFPR), which is a new prudential regime for UK firms authorised under Mifid. Its aim is to streamline and simplify the requirements for firms that are prudentially regulated by the FCA in the UK.
In April, Pimfa issued a warning to advisers on the introduction of the IFPR, saying firms should be aware of it due to its similar size and complexity to Mifid II.
Firms with European subsidiaries will have to implement IFPR by June 2021. UK firms without this have only six months more implementation time.
Charges
The FCA has also warned firms on their disclosure of costs and charges. It said it does not consider consumers to be “fully aware” of the overall cost of their investment.
Under Mifid II, all consumers should receive clear, comprehensive information about the charges they face both at the point of sale and on an ongoing basis.
The FCA said: “We expect your firm to have clear systems and processes for collecting and aggregating all the data that is relevant to both ex-ante and ex-post costs and charges disclosures.
“We also expect you to have considered and continue to monitor how these disclosures are provided to consumers, both in terms of timing and content.”
Furthermore the watchdog told CEOs it expects their firms to ensure client portfolios are managed in line with individual risk profiles, and that the client understands the FSCS consumer protection status and associated risks of those investments.
