Dear CEO | Release Date: 28th September 2023
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a comprehensive update to Chief Executive Officers of firms within its Platforms portfolio, emphasising the importance of these firms in the retail investment value chain. Holding over £800 billion of investment assets for 8.2 million customers, these platforms play a critical gatekeeping role in providing access to multiple funds and shares for advisers and consumers. This letter outlines key harms, updates on regulatory expectations, and summarises ongoing and future supervisory activities.
Key Harms Identified
Fee Transparency and Fair Value
A significant concern for the FCA is that fees and charges by platform firms may not always represent fair value, particularly affecting customers with varying investment sizes. The lack of clear fee disclosure complicates customers’ ability to make informed decisions about the value of services they receive.
Operational Resilience
The FCA notes that platform firms often struggle with robust systems and controls to protect customers from financial losses due to fraud or cyber-attacks. The agency is also concerned about the average time it takes for customers to transfer their investments between platforms, which has shown improvement in some firms but still requires industry-wide enhancement.
Due Diligence on Non-Standard Assets
Historically, some platforms have failed to conduct adequate due diligence on non-standard assets, leading to customers holding unsuitable high-risk investments. This oversight could potentially delay redress payments and increase the risk of firm failure.
System Outages
Operational disruptions, particularly during significant IT upgrades or re-platforming exercises, pose a risk of denying customers access to platform services, which is a critical concern for the FCA.
Emerging Risks
Interest Rate Environment
With rising interest rates, the FCA expects firms to carefully consider how accrued interest on customers’ cash balances is managed and disclosed, ensuring that practices align with the principles of fair value.
Online Trading and Gamification
The growth of online trading applications has introduced risks associated with ‘gamification,’ which may encourage risky short-term trading behaviors that do not necessarily deliver best value for customers.
Regulatory Expectations and Actions
Consumer Duty Compliance
Following the publication of the new Consumer Duty Policy Statement (PS22/9) and Finalised Guidance (FG22/5), the FCA expects platform firms to have fully implemented these standards, promoting higher consumer protection across financial services. Firms are expected to ensure good governance, particularly in changing economic circumstances, and maintain a culture that actively prevents inappropriate conduct.
Supervisory Strategy
The FCA’s supervision strategy will focus on ensuring that platform firms adhere to the new Consumer Duty requirements, especially regarding the transparency of fees and charges and the fair value assessments. The FCA will engage in proactive work to monitor and enforce these areas, addressing any firms that fall short of the expected standards.
Future Engagements
In future supervisory engagements, the FCA will assess whether platform firms have taken appropriate measures to mitigate identified risks and protect consumers and markets effectively. This includes the rigorous oversight of fee structures, operational resilience, and the handling of non-standard assets.
Conclusion
Platform firms are urged to closely review the contents of the FCA’s letter, discuss it with their boards, and ensure that all necessary actions are taken to align with the updated regulatory expectations. The FCA emphasises the need for platforms to help consumers invest with confidence by understanding the risks involved and the regulatory protections in place. Firms are also expected to proactively inform the FCA if any remedial actions are taken or if further risks are identified during their operations. This ongoing dialogue will be crucial for maintaining the integrity and reliability of the services provided by these platforms to their vast customer base.