Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Regulator Sets Out Strategy to Manage Risk of Harm from Wholesale Brokers
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  • UK Regulator Sets Out Strategy to Manage Risk of Harm from Wholesale Brokers
    04/18/2019
    The Financial Conduct Authority has published a "Dear CEO" letter addressed to wholesale market broking firms highlighting its view of the key risks of harm that such brokerage firms pose for their clients and markets and the FCA's strategy for mitigating those risks. Firms are expected to consider the issues raised and take steps to mitigate risks where applicable.

    The key drivers of harm have been identified as commission-based compensation packages (the "eat what you kill" model), inadequate governance arrangements, potential conflict of interest or compliance issues arising from the variety of workflows performed by such brokerages and risks of market abuse and financial crime, all of which may be linked to cultural issues. In the FCA's view, certain brokers in wholesale markets have failed to keep pace with legislative and regulatory developments and lag behind other sectors in embedding a culture of good conduct.

    The FCA intends to implement its strategy to combat these risks over a two-year period, ending in March 2021, through a combination of regime change, supervisory approaches and ongoing monitoring and enforcement. It will prioritise its work around the following key areas:
    1. Compensation and incentives - preliminary results of the FCA's survey of around 50 firms suggest failures to comply with remuneration obligations.
    2. Governance and culture - the FCA intends to work with firms on the implementation of CEO round tables and the FCA's five conduct questions programme.
    3. Capacity and conflicts of interest - the FCA is particularly concerned with the practice by some brokers of inappropriately charging commission to liquidity providers and plans to publish a supervisory statement on the matter, with a view to intervening in cases of continuing non-compliance.
    4. Market abuse and financial crime controls - the FCA expects firms to demonstrate improved surveillance arrangements, as well as increased resource allocation and involvement of senior management in the identification and combatting of risks. It is also investigating deficiencies in policies governing, and the reporting of, personal account dealing and plans to publish its findings later in the year.

    The letter also flags the need for firms to demonstrate continuing vigilance in combatting cyber-crime and to keep the FCA informed of their Brexit planning strategies.

    View the letter.

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