Opinion: Unpicking the regulator’s ‘Dear CEO’ letters

On 25 May 2022, the Financial Conduct Authority published a portfolio letter (in FCA-speak, an open letter to the whole market) to GI intermediaries. The letter is intended to be a shock. It is worth quoting the opening sentence in full:

“Our view of the GI Intermediary Sector overall is that there are significant risks of potential harm that both the market and individual firms need to address.”

This is stiff language by the FCA’s standards. Brokers should sit up and take immediate steps to avoid damaging regulatory action. The letter goes on to set out:

• Their expectations – customers should be supported in purchasing the right product, and in making a claim;

• What they actually see in the market – unsuitable or poor value products, mis-selling, failure to consider consumer outcomes, and ineffective governance and control arrangements.

Misrepresented?

Most GI intermediaries will feel that this completely misrepresents the hard work they put in on behalf of their customers. It would be tempting to conclude that the FCA simply does not understand the market, and to file their letter in the usual place. This would be a mistake. Once the FCA has formed an adverse view, each broker needs to be able to convince a sceptical regulator that their company is different and has taken steps to meet the FCA’s expectations.

The letter draws attention to three main areas of concern:

• Pricing practices and value for money – the FCA refers to the need for the sector to implement the rules following the GI Pricing initiative, and look forward to the requirements of the new Consumer Duty

• Product oversight and governance – the FCA sees poor product oversight and governance as a root cause of poor customer outcomes

• Client assets and orderly wind-down – the pandemic had revealed inadequate CASS arrangements, and poor liquidity planning among intermediaries.

This is stiff language by the FCA’s standards. Brokers should sit up and take immediate steps to avoid damaging regulatory action.”

A big change

How did we get here? There has been a big change in the way the FCA approach the GI market. Previously, brokers had to meet the point-of-sale requirements in ICOBS, and to meet the conduct standards expected of advised sales. But the FCA has moved on to regulate more complex issues such as fair value, and consumer outcomes. It is fair to say that the FCA tried to regulate intermediaries’ adoption of these issues through the carriers. This did not work and, starting with the GI Pricing Practices initiative, the FCA has imposed these more complex requirements on brokers.

How will the FCA oversee this new thinking? The answer lies in the new Consumer Duty – final rules to be published next month. This will require brokers to assess for themselves that they are ensuring good consumer outcomes and providing fair value to their customers. There is a tight implementation deadline of April 2023, and our advice is to start thinking about this immediately.

At the same time, the FCA released a similar letter to the London Market, which identifies four key areas of harm:

• Product suitability and price transparency – the FCA observes that customers are still buying unsuitable products, products which offer poor value, and insufficient cover at point of sale. They put this down to ineffective oversight of the distribution chain, with particularly harsh words for remuneration arrangements which fail to take consumer outcomes into account

• Uncertainty of insurance cover – the FCA refers back to the Business Interruption experience, and express concern about a similar outcome in the cyber field

• Culture – the FCA welcomes the many company initiatives on D&I, but states that the London Market has some way to go before it is truly diverse and inclusive.

• Resilience – the pandemic revealed that many London Market firms had inadequate wind-down plans or had not taken steps to plan for future demands on liquidity. There is inadequate oversight of client money.

You need to do the work to be able convince a sceptical FCA that your company has dealt with the issues set out in the letter.”

Similar themes

So, there are many similar themes to the GI intermediaries’ letter. The London Market letter is more explicit about the need to reflect on the value offered by remuneration. The tone is more trenchant on diversity and inclusion, and on culture.

Some may feel that the letter to the London Market has read across regulatory views developed in the retail market, and fails to reflect the experience of an international wholesale market. It does no good to think like this. Our advice to London Market companies is the same as our advice to GI intermediaries: you need to do the work to be able convince a sceptical FCA that your company has dealt with the issues set out in the letter.

Hugh Savill, senior adviser, Sicsic Advisory