The Financial Conduct Authority (FCA) could be set to make an example of senior managers of non-discretionary investment firms, which have been making profits off the interest accrued from growing client cash weightings this year as investors liquidated positions in response to the market volatility.
FCA executive director of supervision for the investment, wholesale and specialists division Megan Butler warned in a letter to CEOs that the regulator "will continue to review client money balances and follow up with firms" as it has become aware that cash balances have "significantly increased".
She said: "Your firm's relevant senior manager should consider whether the firm needs to hold client money balances which are unlikely to be reinvested, or whether it would be in your clients' better interests to place these balances with their own current or savings account providers.
Both the FCA and its new CEO feel very strongly about unfairness to ‘the man on the street', and they do not want the industry to be confused about that."
"We consider it good practice in this period for firms to communicate with clients about increased client money balances to ascertain whether these should be returned to them or continue to be held by the firm to facilitate further investment in the short term."
Since the Senior Managers & Certification Regime (SMCR) came into force for all regulated firms at the end of last year, the FCA has the power to hold individuals accountable for their conduct and business failures under their management.
Managing director, and global head of compliance and regulatory consulting at Duff & Phelps Monique Melis explained the issue of client cash weightings "goes right to the heart" of SMCR responsibilities to "act with due care skill and diligence, and to act in interest of customers and treat them fairly".
"Senior managers could very well be hauled over the coals here because in SMCR the regulator has a clear tool in its toolkit to do something about this.
"It is in the interest of all of us, so I suspect [the FCA] will make a stand here.
"Both the FCA and its new CEO feel very strongly about unfairness to ‘the man on the street', and they do not want the industry to be confused about that."
Under SMCR, the FCA has the power to issue potentially unlimited fines for individuals as well as lifetime bans.
Melis said: "As they monitor this, if it is bad, they will seek to use the SMCR rules, and go after the unethical behaviour under the conduct rules. That would mean that maybe some individuals would be held accountable."
This article was first published by our sister title Investment Week
