FCA’s Dear CEO letter to Wealth Managers – Focus on Best Execution
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.
If you have any questions on the FCA’s Dear CEO letter and its implications for asset managers and their best execution requirements please contact Vanessa Walters in our Financial Services Regulatory Team on +44 (0)20 7427 6706 or firstname.lastname@example.org.
Sponsor Licence Compliance: Key considerations & how to be audit ready
Join us for the third in our series of mini webinars on post Brexit immigration about sponsor licence compliance.
UK SPACs: could changes to the UK Listing Rules spark an increase?
SPAC listing popularity has increased. Could the UK be the next hotspot following proposed changes to the Listing Rules?
Sustainable Investing: From ESG Integration to Impact Investing
We have a wide perspective on the range of issues that fall within the spectrum from ESG to impact investing.
Liability for costs of repair (City of London v. Leaseholders of Great Arthur House)
Oliver Park writes an article for Lexis®PSL on a property dispute case.
New tax on property developers - consultation paper published
The government published a consultation paper on the design of the new residential property developers tax.
Procuring modular housing: Is MMC becoming mainstream?
Is Modern Methods of Construction becoming mainstream? Read what it means for Development and Procurement here.
Dual class share structures: how do they work and what are the pros and cons?
Dual class share structures allow a shareholder, for example the founder, to retain voting control over a company.
Q&A: Talking the telecoms talk
Georgina Muskett and Jonathan Wills answer queries on Electronic Communications Code agreement.
Property Patter: Navigating the complexities of Pharmacy Property
Pharmacy property is a specialist area which contains many traps for the unwary.
COVID-19 Vaccination – can an employer make it compulsory for employees?
We review what legal issues to take into account when considering to make vaccination compulsory as an employer.
Linking ESG and Executive Pay
How does a business go about embedding a focus on strong ESG performance into the structures and culture of its organisation?
National Security and Investment Act granted Royal Assent
The Act establishes a new regime for the review of mergers, acquisitions and other transactions that could threaten national security.
Recent Trends In Firewall Legislation: BVI, Bermuda And Gibraltar
Charles Russell Speechlys advises Waverton on acquisition of Cornerstone Asset Management
Established in July 2010 and with offices in Edinburgh and Glasgow, Cornerstone offers wealth management and financial planning advice.
What do the new Debt Respite Scheme Regulations mean for Landlords and Tenants?
This will provide legal protection from creditors in the form of either a breathing space or a mental health crisis moratorium.
Charles Russell Speechlys promotes five to Partner
The promotions are effective 1 May 2021 and are accompanied by one Legal Director and 15 Senior Associate promotions.
Risk allocation in commercial leases: the High Court considers rent suspension, insurance and frustration arguments
Read our summary of the full judgement on the latest Covid arrears case.
Charles Russell Speechlys boosts private wealth offering with the hire of an international tax team
Robert Reymond will be joined at the firm by Leigh Nicoll, Emma Tyrrell and Oliver Cooper.
eprivateclient and Citywealth report on the hire of a new international tax team led by Robert Reymond
The firm strengthened its international wealth structuring capabilities with the hire of an international tax team led by Robert Reymond.
Proposed Takeover Code Amendments – Key Changes
The Consultation Paper has now been followed by a corresponding response paper which made certain modifications to the initial proposals.