Although Castledine highlighted the role that wealth managers and stockbrokers play in helping consumers manage, buy and safeguard their assets, she said they have also “lost consumers significant sums to scams and fraud, and have enabled money laundering, causing significant negative economic, market and social damage.”

They have “exposed consumers to inappropriately high-risk or complex investments and provided consumers with poor value products and services,” she said. “The scale of consumers in the sector is significant, with 1.8 mllion portfolios and 14.3 million stockbroking accounts,” the letter, seen by WealthBriefing, states.

“The level of assets under management, combined with the seriousness of these key harms, make this one of the higher risk sectors of financial service firms in our jurisdiction. We appreciate this is a time of significant regulatory change. By working jointly on these issues, we hope to reduce harm, increase standards and improve the sector’s reputation, which is in all our interests,” Castledine continued.

“Our supervision is shifting to become more assertive, intrusive, proactive and data driven. We are conducting more short notice and unannounced visits where we deem it appropriate. And we are significantly increasing the use of our formal intervention powers for the worst cases,” she said.

She expects firms to “not knowingly or otherwise engage or facilitate frauds, scams, or money laundering.” Castledine also expects firms to have implemented the Consumer Duty rules in full, which requires putting the needs of consumers first.

“In particular, we have seen cases where portfolio managers have taken advantage of their established relationships with clients to obscure the risks of unsuitable portfolios which are not aligned to their client’s risk profile,” the letter states.

The letter comes as the UK regulator implements its new Consumer Duty regime, which states that firms should provide customers with products and services that meet their needs and offer fair value. Customers should receive communications which they can understand. They should get the customer support they need when they need it. There are three broad legs to the Duty: A new Principle for Business: The Consumer Principle which requires firms to "act to deliver good outcomes for retail customers"; there is a "Cross-cutting rule" setting out three overarching behavioural expectations that apply across all areas of a firm's conduct; and third, there are "Four Outcomes," which are rules and guidance setting more detailed expectations for firms. 

Focus
In her letter, Castledine said she expects firms to have a clear focus of the needs and objectives of their target market and ensure that products and services remain aligned to consumer’s needs, risk profile and circumstances.

“We continue to see firms charging for services which are not delivered (such as ongoing advice), overtrading on portfolios to generate high transaction fees and providing a product or service which does not align with the needs of consumers (such as an expensive discretionary offering for a low-risk consumer),” the letter continues.

“We are also concerned that firms are not consistently providing clear disclosures on their fees or charging structures. As a result, consumers can be unaware of high fees that significantly reduce their investment returns. In particular, we have seen firms charge high average fees and charge particular individuals very high fees. We will challenge firms to justify such high charges,” it said.

Castledine highlights the need for firms to familiarise themselves with the Consumer Duty regulation, including for consumer support and embedding it into the day-to-day culture and running of the firm. “Among other things, you should remind yourself of all regulatory obligations, for example, operational resilience, following rules set out in the Clients Asset Sourcebook when you hold or control client money, prevent market abuse, have regard to ESG, improve diversity, equity and inclusion and make sure there is no place for non-financial misconduct,” the letter said. “We will build on this by sending all firms a further survey in December 2023, which will be tailored to risks posed by your firm’s business model. Our supervision will become more targeted, intrusive and assertive. Our new, dedicated financial crime function for consumer investments will focus solely on identifying firms with key fraud, scams or money laundering indicators."

“We have already started a major drive with short notice and unannounced visits, particularly for financial crime. And we are increasing the use of our supervisory tools and powers. We will use the Consumer Duty to intervene quickly against potential or actual consumer harms, on an individual or multi firm level. These are strong messages precisely because firms in this sector have an important role to play, given the trust that they are afforded by consumers to grow and look after their investments and support them through key life events,” she said.

“We know that many firms strive to achieve and succeed in promoting good consumer outcomes. We also know that the harm caused by bad actors in this sector unfairly tarnish the reputation of all. So we want to work with you to pursue bad actors and poor practices, which in turn will benefit consumers, raise standards and help good firms prosper,” Castledine concluded.