FCA sets wholesale brokers a challenge to improve further in 2025
Two publications from the FCA in the space of a week have given compliance teams at wholesale broking firms a clear view of where they need to focus for the year ahead. The first is the FCAs interesting follow up to their 2019 paper on Money Laundering through the Markets (MLTM), while the second is the latest in their series of portfolio letters for wholesale brokers. Both will require many brokers to take action and further improve their policies, procedures and controls.
It is clear from both documents that the FCA has completed significant amounts of supervisory work in the sector in recent years, and although areas of good practice are recognised, the FCA still sees a great deal of inconsistency in standards across the industry, and expects many firms to do more.
Money Laundering through the Markets
All wholesale brokers should give the new paper from the FCA a thorough and thoughtful review. The paper demonstrates that the threat of the misuse of the UK markets by criminals remains a significant source of concern for the FCA. It is also evident that the threat is an emerging one, with new risks and behaviour typologies still being discovered and assessed. As such, firms need to remain vigilant, and give careful consideration to their own risks.
While the FCA clearly identified a number of areas of good practice in their review, there are also a number of areas where firms will need to continue to develop their controls:
Business Wide Risk Assessment – the FCA clearly sees comprehensive and tailored risk assessments as the cornerstone of efforts to combat both financial crime and market abuse. Firms should ensure that their risk assessments are updated in line with the new MLTM typologies identified in the paper.
Alignment of controls – another theme the FCA has returned to is the need for better co-operation between teams, and alignment of analysis, across the different facets of financial crime monitoring. Teams engaged in KYC, transaction monitoring and trade surveillance should be sharing information and aligning activities to ensure that complex criminal behaviours can be detected.
Enhancement of processes – the FCA continues to express concerns around the weaknesses of controls and processes in certain firms, particularly whether good practices are being following in KYC, whether reliance is improperly being placed on others in the transaction chain, and whether documentation kept by firms is adequate.
Broker conduct and culture
The FCA continues to express concerns around the culture and conduct of front office staff in broking firms. The risks to both the firm and the market are clear - front office staff can be significant revenue generators and are privy to a wide range of sensitive information, magnifying the potential impact of misconduct. Meanwhile, senior management may feel pressured or incentivised to overlook misconduct where individuals or teams are key to financial performance.
The FCA have clearly signalled their intent to continue work on this topic in the year ahead:
Remuneration code – recently competed work on the remuneration code suggests that many firms in the industry still have not fully implemented the revised code, or have attempted to skirt some of its key provisions. The FCA intends to take further action to bring firms into line with the code, as a tool for managing broker misconduct. Consistent compliance across the industry should reduce the ability of brokers to pressure their employers into non-compliance by leveraging offers from non-compliant competitor firms.
Broker conduct – the FCA have specifically identified broker conduct as an area of focus for supervisory work in the year ahead. In particular the policies for overseeing broker conduct, and methods for detecting instances of broker misconduct, will be scrutinised in firms.
Non-financial misconduct – on the heels of their 2024 survey on non-financial misconduct, the FCA have also set out their plans to do follow up work in the sector on culture. This will include review of policies and procedures to encourage ‘speaking up’, case management of concerns raised, and ensuring fair outcomes are reached.
Capital and Liquidity
A number of adverse markets events, including the disruption in the Nickel market, have caused the FCA to do some focused work on stress testing and liquidity risk in the clearing broker community. This work is due to be published shortly, and will be of interest to all broking firms.
The FCA intends to do further work in the sector on capital and liquidity in the year ahead, to ensure that all firms have implemented IFPR appropriately. In particular the FCA have flagged contingency funding plans and frameworks as an area of heightened focus. As such, firms are recommended to prioritise reviewing their liquidity documentation in the first half of 2025.
All firms are expected to have considered the issues raised by the portfolio letter by the end of March, and agreed an appropriate plan of action. Please get in touch if we can assist with any of the issues raised by either MLTM paper or the portfolio letter.