The number of regulatory warning letters issued by the FCA and the PRA, often referred to as ‘Dear CEO letters’, hit a new high last year, increasing by a fifth to 23 in 2019/20, according to accountancy and business advisory firm BDO.
The firm said a decade ago regulators would rarely issue more than one ‘Dear CEO’ letter a year, but 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 added that as well as specifically targeting the most senior executives in regulated firms, the impact of such letters is also helped by the publicity and media scrutiny that typically accompanies their publication.
Many of the letters also carry the implicit, or often explicit, message that if the compliance failings highlighted in the letter are not dealt with then the senior management of that business may be held to account, which is “consistent with a post-SMCR world”.
The letters require the CEO to confirm the contents have been read, 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 to discuss remedial action with firms.
BDO said ‘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 added that a particular focus of such regulatory 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, said: “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 the mind.”
“It’s an increasingly important tool but the FCA is careful not to use it too frequently lest it lose its power.”
BDO said the impact of Covid-19 on investment portfolios and pensions could prompt regulators to issue even more warning letters.
Treacy added: “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 the 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.”