ENSURING FIRMS CONTINUE TO MEET OUR STANDARDS
• No longer accept that there are some categories of relationship in which we should not be interested because the sophistication of the parties enables them to look after their own interests. In particular, we mean where poor behaviour has a wider impact on trust in the integrity of markets, or where charges and fees within wholesale markets are passed down to retail consumers.
• Continue to recognise the differing degrees of experience and expertise that different consumers may have (and the different degrees of protection offered by current client categorisation rules), but intervene more assertively to supervise existing rules governing the conduct of wholesale participants dealing with each other.
• Look at the possible impact on retail consumers of poor conduct in wholesale markets, even when the linkage is indirect – such as structured products that originate in investment banks, but are then packaged and sold in the retail market.
To apply these principles to how we supervise firms, we will use the same supervisory approach for wholesale activities as for retail, made up of an FSF, issues and product work, and event-driven work. We will use a single FSF to cover all types of firms, considering potential harm to consumers and impact on market integrity arising, in particular, from the failure to identify and manage conflicts of interest.
We will have additional wholesale conduct modules in the FSF for a limited number of insurance, banking and investment C1 and C2 firms (around 30 firms). The modules are yet to be finalised, but are likely to be:
• product design and pre-sales/transaction;
• sales and transacting; and
• post-sales/transaction and ongoing provision of services.
This will be accompanied by more thematic work on key risks and priorities. However, wholesale C3 and C4 firms, which could include large international banks with a smaller wholesale presence in the UK, will not be subject to the same form of regular assessment as retail firms. They will be supervised mainly through issues and products work.
Case study: example of wholesale conduct
Issue: the FCA learns that a wholesale market participant is making additional income by misrepresenting the prices at which individual trades are executed to a professional client during the restructure of a portfolio.
How this differs from the previous supervisory approach: we will recognise the need to protect a wider range of client relationships where there are differences in sophistication or expertise, despite the client being classified as professional. Some clients are not necessarily equipped to police execution quality and prevent harm to themselves or their underlying clients, who are often the ultimate end- investors. Instead of allowing firms to shield themselves behind the principle of ‘caveat emptor’, we will conduct more systematic supervision to facilitate earlier intervention to prevent poor conduct leading to consumer harm or loss of trust in the integrity of that particular market.
Action taken: a supervision team investigates the quality of disclosure between participants and evaluates several potential actions, including the potential for a skilled person report and formal enforcement action. The supervisors also recommend a cross-sector thematic review to evaluate whether other firms may be exposing clients to similar detriment or if there is the option to deploy additional regulatory tools, including changes to rules or industry guidance.
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