The Financial Conduct Authority (FCA) has outlined in a recent Dear CEO Letter that critical expectations and concerns for wealth management firms in the area of portfolio management which we suspect includes MPS model portfolio management. Some of the key points from the FCA’s letter include:
- Risk and Harm Assessment: Firms must fully understand their exposure to risks and harms, often arising from ineffective leadership, governance, and systems. For MPS Model Portfolio managers, critical examination of whether systems are fit for purpose and ‘resilient’ must be asked.
- Consumer Duty Expectations: Firms must prioritize consumer needs, ensuring products and services are aligned with their risk profile and circumstances. The FCA highlights concerns about firms offering high-risk or complex products that may not suit consumer needs. Transparency and consumer understanding of investment products are essential. Whilst this may not impact model portfolio providers directly, we suspect the focus on the overall model portfolio methodology, the accountabilities for each step in the whole process and consumer experience may get included in this scope.
- Price and Value Concerns: The FCA expects firms to regularly assess the value for money of their services and products, making changes where poor value is identified. This includes clear fee disclosures and ensuring that consumers are not overcharged or provided with services that do not align with their needs. For model portfolio providers clear methodologies as to pricing relating to portfolio construction methods may come under scrutiny.
- Supervisory Approach: The FCA is becoming more assertive, intrusive, and data-driven in its supervision. This includes increased use of short notice and unannounced visits, particularly regarding financial crime, and a stronger focus on firms’ compliance with Consumer Duty. For MPS model portfolio providers, this means being ready !
The FCA’s letter serves as a crucial wake-up call for firms in the MPS sector. It underscores the need for rigorous internal controls, a strong focus on consumer interests, and proactive compliance with regulatory expectations.
Firms are advised to thoroughly review their practices and make necessary adjustments to align with the FCA’s directives. This approach is not only essential for regulatory compliance but also vital for maintaining consumer trust and the firm’s reputation in a highly scrutinized industry.
If you ask yourself the key question ‘Are the systems we use for model portfolio management what the consumer and regulator would expect ?’ and struggle to answer ‘Yes’ then perhaps it is time to investigate further.
The clock is ticking..