The number of Dear CEO letters issued by the Financial Conduct Authority and Prudential Regulation Authority increased by a fifth last year, setting a new record.
Data analysis from accountancy firm BDO has shown 23 regulatory warning letters were issued by the two regulators in the 2019/20 tax year, up from 19 in 2018/19.
According to the firm, the effectiveness of these type of letters on focusing financial services firms’ attention on high-risk issues has led the FCA and PRA to increase their usage in recent years, whereas a decade ago regulators would rarely issue more than one Dear CEO letter a year.
The letters are an immediate way for regulators to highlight to firms which areas of the industry they will be scrutinising over the coming months and that failure to implement the recommended actions will result in penalties.
CEOs are required to confirm the contents of the letter have been read, understood and that the firm is operating in compliance with regulatory rules.
A particular focus of these letters in recent years has been on protecting retail investors as the FCA puts more emphasis on consumer protection in areas such as peer-to-peer lending or investments via self-invested personal pensions.
Leigh Treacy, head of financial services advisory at BDO, said: “The record number of ‘Dear CEO’ letters suggests the FCA and PRA feel that they work. Regulators feel that communicating direct with CEOs cuts through the noise and concentrates the mind.
“It’s an increasingly important tool but the FCA is careful not to use it too frequently lest it loose its power.”
Number of Dear CEO letters issued:
But Ms Treacy warned the impact of Covid-19 on pensions and investments may cause the regulators to issue even more warning letters.
Two Dear CEO letters have already been issued by the regulators raising concerns about how firms are addressing the coronavirus.
The FCA issued a letter in March urging all firms providing services to retail investors to offer clear advice and provide support to their customers during the crisis.
Meanwhile, the PRA sent one urging all lenders not to impose penalties or restrictions on customers breaching loan covenants due to coronavirus.
Ms Treacy said: “The coronavirus crisis is inevitably going to create a web of new problems that the FCA and the PRA are going to want boards to tackle as soon as possible.”
“We also expect that the coronavirus will give a further impetus to the digitisation of financial services with increased demand for fintech innovations in underwriting and anti-money laundering and as such, we are likely to see more Dear CEO letters focused on this challenger element of retail financial services.”
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