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, 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 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.
These letters too, 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.
‘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 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, 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 the mind.”
“It’s an increasingly important tool but the FCA is careful not to use it too frequently lest it lose its power.”