FCA warns wholesale firms over broker conduct
In a “Dear CEO” letter, the UK Financial Conduct Authority (FCA) has informed wholesale firms of strategic areas which will be the focus of its program of proactive work.
Brokers are the main revenue earners for their firms and are also the main points of contact for clients. These two factors mean that they hold significant bargaining power over their employer.
Furthermore, brokers have access to sensitive and valuable information such as the overall supply-demand dynamics of the market, as well as the trading intentions of their clients. If not properly managed, these drivers of risk can lead to two types of harm.
First, there is an inherent conflict of interest where a broker’s personal interest might go against that of their client, preventing the latter from achieving best outcomes. Second, firms could be incentivised to actively ignore instances of misconduct if the broker engaging in misconduct (whether financial or non-financial) is also a significant revenue producer.
Consequently, if there is inadequate oversight of front office activity, the sorts of risks that can crystallise include:
- Insider trading – for example, when brokers use non-public, material information to trade ahead of clients for personal gain.
- Market abuse, resulting from creating a false impression of market liquidity or price by unaccountable brokers.
- Overcharging clients for order execution, particularly in more niche markets or markets where participants are less sophisticated.
- Abuse of gifts and entertainment so that trade flow is directed towards specific brokers/desks, in contravention of best execution requirements.
- Non-financial misconduct, where firms tolerate or turn a blind eye to discrimination, harassment and bullying by employees, particularly if they are ‘star’ brokers/performers.
Given this, the FCA will be conducting targeted work to assess how firms manage their brokers. The regulator expects firms to have suitable controls in place to detect misconduct and to take appropriate action against those found to be committing misconduct.
If the FCA identifies material weaknesses in the frameworks governing broker conduct, it will take actions which may include restrictions placed on individual firms or enforcement action against firms or individuals.