Financial Conduct Authority (FCA) Portfolio Letter

February 26, 2020

In April 2019, The FCA set about their new approach to supervision, which includes a portfolio letter that they will send every two years. Each sector is split into a series of portfolios, with each comprising of firms with similar business models. These portfolios are not static and adapt as business models change. At present, The FCA group financial services firms into approximately 40 portfolios.

The FCA have around 37,000 Credit Brokerage firms of which 21,000 are directly in the credit broker cohort. The letters are released in a phased approach due to the size of the sector. Some NACFB Members may not have received this letter, this does not mean your firm will not receive it.

How are the portfolios decided?

Each portfolio is created based on your regulated activity turnover. Whichever regulated activity generates the highest income will denote your portfolio cohort. For example, a credit broker, who generates their highest income from retail lending would be under the retail Lending portfolio, not credit broking.

One of these portfolio letters is for credit brokers.

The FCA uses intelligence from sources such as a firm’s regulatory history as well as the type and number of complaints which the FCA has received from a multitude of channels to provide an outline of the key drivers of harm within each cohort.

A Sample of drivers of harm

Many firms did not understand their regulatory requirements. This included what permissions they need and the need to complete accurate returns.

Firms have poor oversight of staff and/or Appointed Representatives’ (ARs) activities. This leaves sales practices unchecked, which potentially increases the risk of mis-selling, fraud or other poor consumer outcomes.

The increased risk of harm to customers by domestic premises suppliers where the sale of goods or services is made in the home, especially when such customers are vulnerable.

Misleading or inaccurate financial promotions. These risks consumers making uninformed decisions, such as signing up to poor value deals. Firms not explaining the level of service provided, or other factors likely to influence a customer’s decision, for example whether:

  • they have arrangements to refer customers onto specific lenders
  • they are tied agents or make ‘whole of market’ introductions
  • the lenders referred to have any connections to the firm, or
  • the firm gets commission from an introduction to the lender.

Where the firm is responsible for providing product information, not providing adequate or relevant information to allow consumers to make informed choices about finance products or taking reasonable steps to ensure recommended products are not unsuitable.

Not considering or managing the risks to their business from technology, cyberattacks and inadequate IT resilience.

FCA focus areas

The FCA are to prioritise their supervisory work in the following areas:

Accurate regulatory data: Firms subject to Sup 16.10 rules are required to review and confirm their Firm Details annually, within 60 business days of their Accounting Reference Date (ARD).

Understanding the customer journey and staff/AR oversight: work is currently underway within the FCA with a number of firms to look at the credit brokers of Third-Party Finance Providers (TPFPs) This work will provide further clarity on every stage of a customer’s journey, including how they get information at each stage and where they go to complain.

 It will also examine a firms’ oversight of their staff and ARs to prevent the risk of mis-selling.

The FCA expects regulated firms to take notice of the areas of concern which were set out in the full letter. Firms are expected to examine existing business models and consider whether changes are required to reduce harm or potential harm to consumers.