On 29 September 2023, the FCA published a Dear CEO letter on its platforms’ portfolio supervision strategy.
Following the FCA’s strategy letters of February 2020 and July 2021, this Dear CEO letter provides firms with an update on the FCA’s view of the key harms in this sector, the FCA’s expectations of firms and a summary of the work the FCA intends to do.
In the Dear CEO letter the FCA highlights the following concerns about harm:
- Fees and charges may not represent fair value, especially when looking at customers with different size investment pots and taking into regard platforms’ role in the distribution chain. Platform fees are also not properly disclosed, making it difficult for customers to have a clear understanding of what they are being charged. This also makes it harder for customers to make judgements on the value of the products and services they are paying for.
- Platform firms do not have sufficiently robust systems and controls to protect customers from loss of investment savings or personal data due to fraud and/or cyber-attacks.
- The average time it takes customers to transfer their investments and savings between platforms has improved for some firms in the portfolio, but more needs to be done to ensure average transfer times are shorter for all customers.
- Platform firms’ historic failure to conduct proper due diligence of non-standard assets (NSAs) has led to customers holding unsuitable high-risk investments. The FCA are concerned that firms are not properly acknowledging or accurately calculating their liabilities relating to NSAs, which could lead to delays in customer redress payments and increase the potential for firm failure.
- Customers lose access to platform services due to system outages or other operational resilience failures. This is of particular concern when platforms are undergoing significant IT upgrades or conducting re-platforming exercises.
The Dear CEO letter also highlights the following emerging risks of harm:
- Where interest payments are accrued on customers’ cash balances held by firms, this should be carefully considered as part of fair value assessments and to ensure appropriate disclosure, especially in the current economic environment of higher interest rates. The FCA’s expectation is that firms deliver fair value to customers and support consumer understanding in line with the requirements of the Consumer Duty.
- The emerging trends in the market for executing investment transactions online by retail customers have seen the growth of online trading applications platforms. The FCA’s recent focused studies found business practices akin to ‘gamification’, that overly encourage risky short term trading including brokerage deals that fail to deliver best value for customers. The FCA’s expectation is that firms should maintain controls and capabilities to understand and effectively monitor customers’ trading activities, ensure customers are adequately informed of relevant risks and protect customers from reckless trading and scams.
The Dear CEO letter also mentions that the FCA is focused on the following areas:
- Consumer Duty, Fee Transparency and Fair value. A key risk for the platforms’ portfolio is that the quality and value of product offerings or, the quality of communications with customers, do not deliver good outcomes for consumers or meet their needs.
- Non-Standard Assets. The FCA published guidance in Finalised Guidance 20/1 Our framework: assessing adequate financial resources on how firms should assess their financial resources, which includes looking proportionately at the risks to which a firm is exposed.
- Operational resilience. The FCA’s previous portfolio letter outlined its expectations for firms’ compliance with Policy Statement 21/3 Building Operational Resilience. These expectations still stand. By Q4 2023 the FCA will request data to monitor and test platform firms’ ability to meet this Policy Statement.
- Fraud controls. The FCA has seen examples in its supervisory work where, the adviser charging function has been mis-used by rogue advisers to defraud consumers of significant amounts of money. In 2023/24 the FCA will be selecting a sample of firms in the platform portfolio that facilitate adviser charging alongside firms in other portfolios offering similar services. This sample of firms will be asked to complete a questionnaire and the FCA will use the responses to assess the effectiveness of the systems and controls that firms have in place to ensure that advisers are charging their customers appropriately. The FCA will feedback the findings from its review to firms in due course.
- Transfer times. In the light of the Consumer Duty, the FCA will be using the next iteration of its data request to continue to monitor and ensure sustained and significant improvements in transfer times across the sector, taking further action against outliers.
- Consumer Duty. The FCA’s review of platform firms’ Duty implementation plans suggests some firms may have been slow in engaging with the substantive requirements. This brings a risk that firms have not embedded the Duty effectively throughout their business. The FCA urges firms to continue to carefully consider the substantive elements of the Duty on an ongoing basis to identify further changes that may be required. If a firm considers that specific rules do not apply to their business, the FCA will expect them to provide clear evidence of the reason for this.
The Dear CEO letter concludes by noting that, firms are responsible for ensuring that they meet the FCA’s requirements including the obligations and expectations set out above. Firms should take all necessary action to ensure these are met. The FCA will use the Senior Managers & Certification Regime to engage directly with accountable individuals on areas of concern.