The Financial Conduct Authority has written to wealth managers warning of consumer risk in their sector and pledging to take action against firms which have a "disproportionate impact" on trust in the market.
In a Dear CEO letter sent to wealth management and stockbroking firms last month, and published on the regulator's website yesterday (July 23), the FCA said it may undertake further supervisory and regulatory work in key areas of harm it had identified in the market, including cost and charges disclosure under the Markets in Financial Instruments Directive and platform switching.
Debbie Gupta, director of life insurance and financial advice at the FCA, said the regulator had "identified and taken action against" a number of firms in recent years which abused consumer trust by using client portfolios in investment scams or to conduct market abuse.
In the letter Ms Gupta encouraged firms to contact the FCA's whistleblowing team with any suspicions a firm or an individual is "involved in wrongdoing" and warned the regulator expects wealth managers to "ensure suitability" in a client's portfolio and not include high risk investments "inappropriately".
She said: "This remains a priority area for us. We will use a range of data to identify the small number of firms who cause issues, deliberately or not.
"These firms have a disproportionate impact on trust in the market, creating costs for the industry and for consumers. Once identified, we will take appropriate action with these firms."
Ms Gupta said the FCA had already begun work in this area which would progress through till next year.
The regulator also said it was considering conducting further work to assess how firms are implementing ex-post costs and charges disclosure under Mifid II, following a review of a sample of 50 firms earlier this year.
This review showed whilst firms knew about their obligations to disclose costs and charges, rules were interpreted in different ways and companies were "better at disclosing the costs of their own services than at disclosing relevant third-party costs and charges".
Ms Gupta said: "We expect you to review your own costs and charges disclosures to ensure they are satisfying all relevant requirements, including for both ex-ante and ex-post costs and charges disclosures.
"You should be particularly alert to the need to disclose all transaction and incidental costs and charges to customers. These include implicit transaction costs and performance fees."
Cost disclosure requirements under Mifid II came into effect in January 2018, but it is only this year advisers have had to begin disclosing actual costs and charges associated with client investments, rather than just estimates.
Ms Gupta also told wealth managers improving the platform switching process "remained a priority" for the regulator, promising to review progress made by the market in this area later this year and in 2020.
In March the FCA published the final report of its investment platforms market study which found while the market is generally "working well", switching takes time, is complex, and expensive, due to exit fees.
Ms Gupta warned CEOs the regulator would consider further regulatory action if the efficiency of the switching process has not improved as a result of its previous warnings.
She added: "We welcome the progress industry is making to improve the switching process. Most recently the STAR initiative has aimed to improve the efficiency of the transfer process across the retail investment and pensions sectors.
"We encourage firms not already involved in this initiative to consider taking part as one way of improving the switching process and achieving better outcomes for consumers."
rachel.addison@ft.com
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