Dear CEO | Release Date: 6th February 2020
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
This letter is directed to firms within the ‘platforms’ portfolio and outlines the Financial Conduct Authority’s (FCA) strategic approach and supervisory priorities. As platforms increasingly become integral to the delivery of investment and retirement solutions, it is crucial that these firms align their operational frameworks with regulatory expectations, particularly in light of the Senior Managers & Certification Regime (SM&CR) extended to solo-regulated firms from 9 December 2019. The FCA’s ongoing commitment to pre-emptive supervision necessitates that firms not only comply with existing regulations but also proactively engage in risk management practices to safeguard consumer interests.
Supervisory Strategy and Regulatory Expectations
Technological and Operational Resilience
In an era where technology underpins critical financial services, platforms must ensure substantial investment in their technological infrastructure and operational processes. This investment is crucial to avoid service disruptions that can adversely affect customers and advisers. The FCA emphasises the importance of diligent planning, comprehensive testing, and execution of technology upgrades and migrations, highlighting the necessity for robust change management processes to mitigate risks associated with these activities.
Expected Actions:
- Develop and maintain a resilient technological infrastructure that supports business continuity and data integrity.
- Implement comprehensive testing and monitoring frameworks to ensure new technological deployments do not compromise service quality.
- Establish clear protocols for incident management and rapid resolution of technology-related issues.
Third-Party Outsourcing
Effective governance and oversight of third-party outsourcing arrangements are critical to maintaining operational resilience and ensuring service continuity. Under the SM&CR, accountability for outsourced functions remains firmly with the hiring firm, necessitating detailed and enforceable contractual arrangements and continuous oversight.
Expected Actions:
- Conduct thorough due diligence and regular performance reviews of third-party service providers to ensure compliance with contractual obligations and regulatory standards.
- Develop contingency plans to manage and mitigate risks from third-party failures, including detailed action plans for rapid response to operational disruptions.
- Ensure that all outsourced activities are governed by clear, comprehensive agreements that define roles, responsibilities, and expectations for both parties.
Conflicts of Interest
Conflicts of interest, if not properly managed, can lead to consumers receiving suboptimal services or products, potentially harming their financial interests. Platforms must rigorously identify potential conflicts and enforce strict controls to manage and neutralise these risks effectively.
Expected Actions:
- Implement robust systems to identify, assess, and manage conflicts of interest across all operational areas.
- Ensure transparency in the construction and maintenance of ‘Best Buy’ lists, with documented processes for fund selection and deselection based on objective criteria.
- Regularly review and update conflict of interest policies to reflect changes in market practices and regulatory guidelines.
Investment Platforms Market Study (IPMS) Compliance
Following the FCA’s IPMS final report, platforms are expected to critically assess their practices and align them with the study’s findings and recommendations. Key areas of focus include simplifying customer transfers and ensuring compliance with best execution standards.
Expected Actions:
- Adhere to the new rules for customer transfers as outlined in PS19/29 to facilitate smoother, more efficient transfer processes.
- Engage with industry initiatives such as the STAR to enhance the overall customer switching experience.
- Continuously improve trade execution processes to ensure compliance with best execution obligations and provide transparent reporting on execution quality.
EU Withdrawal Considerations
With the UK having left the EU and the transition period in place until 31 December 2020, platforms must meticulously plan for the post-transition regulatory landscape. This preparation is vital to ensure that platform operations remain compliant and that services to EU clients are not disrupted.
Expected Actions:
- Thoroughly assess the potential impacts of the transition period’s conclusion on operational and regulatory frameworks.
- Engage in scenario planning to address various potential outcomes of the UK’s negotiations with the EU, ensuring readiness for all eventualities.
Conclusion and Next Steps
Platforms must ensure strict adherence to the FCA’s guidelines and proactively engage with the regulator to demonstrate compliance. The FCA will closely monitor platform activities, focusing on areas where non-compliance poses significant risks to consumer outcomes. Firms are encouraged to integrate these guidelines into their strategic planning and operational practices to enhance consumer protection and market integrity.
Key Takeaways and Actions for Firms
- Enhance Technological and Operational Frameworks: Invest in robust technological systems and operational processes to ensure service reliability and data security.
- Strengthen Third-Party Oversight: Implement rigorous governance frameworks for managing third-party risks and ensure comprehensive oversight of outsourced functions.
- Manage Conflicts of Interest Effectively: Develop and maintain effective controls to identify and mitigate conflicts of interest, ensuring fair treatment of consumers.
- Align with Regulatory Changes: Stay informed about regulatory developments and align operational practices with FCA expectations, particularly those arising from the IPMS.
- Prepare for Brexit: Proactively manage the implications of the UK’s departure from the EU, ensuring that operational and strategic plans are adaptable to changes in the regulatory environment.
Firms are expected to take these points seriously and integrate them into their governance and operational strategies. The FCA will employ a range of supervisory tools to ensure compliance and address any deficiencies identified during its supervisory activities.