Dear CEO letter sets out the FCA’s supervisory strategy for platforms

The FCA’s Dear CEO letter (the Letter), published on 6 February 2020, was sent to firms in its platforms portfolio and sets out the regulator’s key concerns and expectations of firms in this sector.

This is one of a series of Dear CEO letters that the FCA has published in the last few weeks. These include:

• the Dear CEO letter sent to alternatives managers – see our summary here
• the Dear CEO letter sent to asset managers – see our summary here
• the Dear CEO letter sent to financial advisers – see our summary here.

Overview

Noting that the platforms sector is “likely to continue to grow and play an increasing role in the provision of investment and retirement services to consumers”, the Letter identifies five areas of ‘key harm’ which the FCA’s supervision strategy will address.

The FCA expects firms which provide a platform service to take note of its concerns - its supervisory focus will be directed at those it finds to be failing to meet the expectations it sets out.

The Letter stresses that, following the extension of the SM&CR to solo-regulated firms from 9 December 2019

• firms should have clear accountability at the senior management level; and
• individuals should have a good understanding of their roles and responsibilities in addressing the issues outlined.

Indeed, the FCA expressly notes flags up that it “will use the SM&CR to engage directly with accountable individuals on areas of concern”.

The Letter will also be of interest to those accessing retail investment products through an online portal.

The key harms identified

Technology and operational resilience

Accountable individuals under the SM&CR should be responsible for operational resilience and should prioritise plans and investment choices according to their wider potential impact – this includes considering customer interests and the importance of business continuity.

One aspect that the FCA specifically highlights is the need to protect customer assets and data from the threat of cyber-attack.

Firms must ensure that there is clear responsibility to meet reporting obligations for operational incidents (including cyber-attacks) to the FCA and other relevant agencies.

Third-party outsourcing

“Inadequate governance and oversight, risk management and clear contractual arrangements with third-party outsourcers” are identified as matters which raise operational resilience risks both to firms and to their customers.

As far as outsourcers are concerned, the FCA would expect firms to have in place clear contractual arrangements and plans, covering such things as documenting responsibility and actions for incident management, outages and potential wind down.

Firms should also review their outsourcing arrangements to ensure the service provider is performing the services to a proper standard and that risks are properly managed, keeping in mind concentration risk in outsourced providers and the potential impact this could have on business continuity.

Conflicts of interest

The FCA expects firms to identify all potential conflicts of interest and to have in place processes to manage these effectively, thereby reducing the risk that customers receive products or services that are unsuitable for their needs.

In particular, firms that operate Best Buy lists should construct these impartially and should manage conflicts such as

• a preference for funds which offer discounts over formal and objective criteria;
• lack of independence of research teams; and
• associated governance.

Processes for selecting, monitoring and deselecting funds on Best Buy lists should be “documented, understood and followed”.

Investment Platforms Market Study (IPMS)

The FCA’s IPMS final report was published in March 2019. Firms should be considering whether there are areas where they should be implementing its findings and recommendations.

Specific areas where the FCA believes action may be needed include:

• Transfers
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  New rules to make transfers simpler were set out in published in PS19/29. At the same time, the FCA also published the outcome of its review of industry progress to improve the switching process.
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  Firms not already involved in the industry’s STAR initiative are encouraged to take part as the FCA sees this as a way to help improve the switching process and achieve better outcomes for consumers. The FCA will review progress during 2022 and, if it finds that consumers’ experience of the switching process has not continued to improve, it will consider taking further action.

• Best execution (Best Ex)‏‏‎
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  The Letter reminds firms that they should consider their Best Ex arrangements (especially when reliant on a single Retail Service Provider) and should have:

  • effective day-to-day trade execution processes;
  • contingent arrangements for periods of market distress; and
  • clear, comprehensive and effective oversight and monitoring.

• Information on costs and charges‎‎‎
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  Firms should comply with the requirements in MiFID II (both ex-ante and ex-post) as well as other obligations to disclose charges. The FCA also expects platforms to make it increasingly easy for consumers to compare the costs of different options when they shop around.

EU withdrawal

Following the UK’s departure from the EU on 31 January 2020, an implementation period will operate until 31 December 2020, during which EU law continues to apply in the UK and passporting is still possible.

Firms are expected to consider how the end of the implementation period will affect them and their customers, and what action they may need to take to be ready for 1 January 2021.