The number of “Dear CEO”-style warning letters issued by the FCA and the PRA hit a new high last year, increasing by a fifth to 23 in 2019/20, up from 19 in 2018/19*, says accountancy and business advisory firm, BDO LLP.
A decade ago regulators would rarely issue more than one “Dear CEO” letter a year. However, their effectiveness in focusing financial services firms’ attention on high-risk issues has led the FCA and PRA to step up their usage in recent years.
BDO explains that, as well as specifically targeting the most senior executives in regulated firms, the impact of ‘Dear CEO’ letters is also helped by the publicity and media scrutiny that typically accompanies their publication.
Many “Dear CEO” letters also carry the implicit, or often explicit, message that if the compliance failings highlighted in the letter are not fixed then the senior management of that business may be held to account, which is consistent with a post SMCR world.
Some “Dear CEO” letters require the CEO to confirm the contents have been read and understood and that the firm is operating in compliance with regulatory rules. These written responses then help regulators understand if there is an unclear division of responsibility at a firm and discuss remedial action with firms.
‘Dear CEO’ letters are also an immediate way for regulators to highlight to firms which areas of the industry they will be scrutinising over the coming months and failure to implement the recommended actions will result in penalties.
BDO adds a particular focus of ‘Dear CEO’ letters in recent years has been on protecting retail investors as the FCA puts more emphasis on consumer protection in areas such as peer-to-peer lending or sub-prime lending.
Leigh Treacy, Head of Financial Services Advisory at BDO, says: “The record number of ‘Dear CEO’ letters suggests the FCA and PRA feel that they work. Regulators feel that communicating direct with CEO cuts through the noise and concentrates mind.”
“It’s an increasingly important tool but the FCA is careful not to use it too frequently lest it lose its power.”
Impact of Covid-19 on investment portfolios and pensions could prompt regulators to issue even more warning letters
BDO says the impact of the virus outbreak on individuals’ investment portfolios and pensions and on lending could prompt regulators to issue further ‘Dear CEO’ letters to firms to ensure they are taking steps to mitigate the financial impact caused by the crisis.
Two ‘Dear CEO’ letters have already been issued by regulators raising concerns about how firms are addressing coronavirus. These include:
- The FCA issuing a letter urging all firms providing services to retail investors to offer clear advice and provide support to their customers during the crisis
- The PRA issuing a letter urging all lenders not to impose penalties or restrictions on customers breaching loan covenants due to coronavirus
Leigh Treacy adds: “The coronavirus crisis is inevitably going to create a web of new problems that the FCA and the PRA are going to want boards to tackle as soon as possible.”
“We also expect that coronavirus will give a further impetus to the digitisation of financial services with increased demand for fintech innovations in underwriting and AML and as such, we are likely to see more Dear CEO letters focused on this challenger element of retail financial services.”
Number of ‘Dear CEO’-style warning letters jumps 23% in just a year to 23 in 2019/20
*Source: FCA and PRA (year-end March 31), includes those addressed to the CEO or Chair
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