Portfolio letter: Wholesale brokers 2023 [pdf]

The Financial Conduct Authority (FCA) has published an open portfolio letter addressed at CEOs of wholesale brokers to summarize the key risks (of harm) the regulator has identified in connection with these firms and the markets they operate in and to outline its supervisory focus and expectations regarding the mitigation of these risks. According to the FCA, the key risks primarily concern the following:
(1) Financial Resilience: Particularly in view of the recent market turmoils, the FCA is concerned about the risk management practices of some brokers as regards their financial risks. Specifically, so the FCA, firms often have neglected their intraday liquidity risks leading to high risk exposures. In this context, the FCA reminds wholesale brokers to review their liquidity risk management practices and ensure that they are in line with the requirements set out in the new Investment Firm Prudential Regime (IFPR) and commensurate to the risks they are exposed to. The FCA will not hesitate to step in and take action – including firm reviews and business restrictions – against firms not complying with this requirement.
(2) Remuneration structures: The current remuneration policies of wholesale brokers are far too often structured in a way that provides little fixed income, but a high level of bonus payments for reaching certain targets (e.g. client trading volume). Such structures are prone to favor short-term outcomes of staff members at the expense of client interests. In this context, the FCA expects firms to comply with the MIFIDPRU Remuneration Code (SYSC19G) and to provide evidence of such compliance. Firms failing to do so will be faced with additional regulatory action, including the imposition of additional capital requirements by the FCA.
(3) Governance and culture: The FCA once again emphasizes the need to have a Board of Directors with a diverse, yet suitable mix of competence and experience to promote „good decision making and individual accountability“. In so far, wholesale brokers shall continue to „embrace the Senior Managers and Certification Regime (SMCR)“ and shall not expect any sympathy from the regulator if they hire (senior) staff that has been sanctioned at other firms or that have proven to take on excessive risks. It is the obligation of firms to put adequate governance structures in place to ensure that their hiring decisions are in line with the corporate governance strategy and particularly their risk appetite.
(4) Control functions: Wholesale brokers, like all other FCA-supervised firms, are expected to have adequate control functions and to provide a corporate culture where regulatory compliance is actively encouraged. In the past, the FCA has often observed weak oversight over staff and systems particularly with respect to the prevention of financial crimes (money laundering) and market abuse. In fact, many brokers still lack adequate control mechanisms, e.g. in the onboarding of clients. Therefore, the FCA will pick up on this issue in 2023 and enhance market surveillance in this context.
To conclude, the FCA notes that it expects all wholesale brokers to review this letter and reflect on their own practices to ensure regulatory compliance.