FCA reveals broker probe, says individuals wield too much power

The UK Financial Conduct Authority (FCA) is concerned that individual brokers wield too much power over their employers, and is conducting “targeted work” to assess how wholesale brokerage firms manage their brokers’ conduct and remuneration.

This imbalance may contribute to firms “skirting” the Remuneration Code rules, while a lack of oversight could crystallise as serious misconduct, the authority said in a Dear CEO letter to wholesale brokers. It will also test whether brokerage firms use remuneration as an effective disciplinary tool to address broker wrongdoing, including non-financial misconduct (NFM).

“There is an evolutionary taxonomy of markets, and brokers have been on the low end of the maturity scale for conduct and culture for some time,” said Dr Roger Miles, a behavioural investigator specialising in financial services conduct and culture in London.

The FCA wrote to wholesale brokers in 2019 and 2023 covering similar points, but this time it noted that firms have made uneven progress in improving and ensuring compliance in important areas. The authority pledged to act where necessary with board effectiveness reviews, increased capital requirements, business restrictions or enforcement action against firms or individuals. These actions would ensure “outlier” firms do not cause ongoing harm to the UK market, it said.

Bargaining power

As firms’ main revenue earners and point of contact for clients, brokers hold “significant” bargaining power in terms of their access to sensitive and valuable information about overall supply-demand dynamics and clients’ trading intentions. Firms could therefore be incentivised to ignore instances of misconduct “actively” if the broker engaging in misconduct is a big revenue producer, the FCA said.

“If you are looking for behavioural drivers, follow the money. It’s not a profound psychological truth. It’s transactional,” Miles said.

To illustrate the power brokers can hold, he recalled an anecdote from a chief risk officer who was invited to sit on a board meeting at a US firm and witnessed a conversation between the head of sales and the finance director. “The head of sales said, ‘Mate, Iʼm the rain and youʼre the plumbing’. This was to the finance director in the board meeting, in the presence of the chairman. That has always stuck with me as being a well-put summary of the broker worldview,” Miles said.

Tone from the top

The FCA reiterated its view that good conduct stems from a good culture, which is set by a “strong tone from the top”. Diverse boards provide more effective challenges and enable better decision making, it said, while more homogenous boards and executive teams could increase conduct risk, including from poor individual brokers.

The FCA will use its NFM results to target outlier firms for conduct and culture reviews, and seek to “scrutinise” some firms’ procedures for reporting NFM concerns.

Gavin Stewart, an independent regulatory commentator and former UK regulator, is sceptical about the idea that tone from the top by itself can shift firms’ cultures.

“I heard its importance talked about a lot after the financial crisis, but it didn’t seem to make much difference, and it wasn’t clear to me that the incentives on the ground had changed much. No matter what the chief executive says, if the incentive structure encourages different behaviour, that’s probably what you’re going to get. Maybe this has changed, but I also thought too little attention was paid to boards and shareholders. The focus tended to be on chief executives, and I always thought the role of boards and shareholders were underplayed in terms of setting incentives and culture,” he said.

Stewart also questioned how much board diversity was an antidote to misconduct. “You can believe diverse boards are a good thing without thinking they will necessarily make a material difference to the amount of misconduct that happens. It would be good to see the hard evidence supporting some of the statements in the letter,” he said.