October 2023
The FCA has written to the CEOs of platforms to set out its supervisory priorities. This letter(PDF 184KB) sounds a warning to firms to, once and for all, get on top of ongoing issues and ensure that customers are protected from harm. This article outlines the FCA's priorities and expectations, their interplay with the Consumer Duty, and considerations for firms.
Most themes are consistent with the FCA's 2020 and 2021 letters. However, the context in which these priorities sit is significant — the higher standard of consumer protection brought in by the Consumer Duty and the challenging economic climate. Given the recurring nature of the core themes, the FCA's patience is likely wearing thin and it will likely lose no time leveraging the Duty to bring about the change it wants to see in the market. It is therefore imperative that firms take action to consider, and where necessary, address any weaknesses. Evidencing the delivery of good customer outcomes in those areas will be essential.
Priorities for platform firms
The FCA highlights five key harms and two emerging risks of harm (see the table below for notable FCA expectations and planned activity in these areas):
Key harms
- Fair value — platform fees and charges may not represent fair value and/or are not appropriately disclosed.
- Information security — platform firms may not have robust processes and controls to protect against cyber-attacks, fraud and prevent the potential abuse of platform functionalities.
- Transfer times — platform firms have not adequately sped up transfer times to a reasonable level and/or transfer times in and out are disproportionally misaligned.
- Non-standard assets (NSA) due diligence — FCA concerns relating to the ongoing impact of historic failures in due diligence for high risk NSAs, resulting in poor customer outcomes and associated liability exposure for platforms and their financial resources.
- Operational resilience — FCA is concerned about the resilience of firms and potential impacts on firms and their customers due to a potential loss of access.
Emerging Harms
- Interest payments on cash balances — FCA is seeking to understand whether/how interest is considered as part of fair value assessments, taking into account changes to the economic environment, including rising interest rates, and how this could impact consumer outcomes.
- Gamification of trading — FCA is concerned about market trends for online investment transactions and business practices encouraging risky short-term trading which may fail to deliver fair value for customers.
Other focus areas
Whilst Diversity and Inclusion (D&I) isn't included as a key harm, its importance should not be underestimated as the FCA states that “boards should have members with diverse thoughts and expertise ” and “appropriate independent representation ”. Notably, the FCA also highlights the importance of a good culture and preventing bullying and wider non-financial misconduct — on all these points there are clear links to the FCA's recent D&I consultation (see summary and insight here). Given the importance of a good organisational culture to deliver the outcomes expected by the Duty, firms should review their board composition and the FCA's proposals in the consultation.
“We also expect a strong commitment to ensuring a culture that roots out and takes strong action in relation to inappropriate conduct at all levels”
To find out more about creating the right conditions to thrive under the Duty, see an article here.
Summary of the FCA's expectations and plans
| Key Harms | Notable FCA expectations | Planned FCA work |
| Fees & charges | Firms should perform a regular review of product offerings and risks. Firms should have already acted on FCA’s May 2023 Fair Value findings. Firms should have embedded the Duty, resulting in positive changes. | FCA will review compliance with the Duty as part of proactive supervision – including proactive work on fair value, transparency/costs. FCA will also do work on interest payments – see below. |
| Information security & protection from fraud | Firms must rigorously monitor facilitated adviser charging and be aware of customers being exploited, including regular reviews of fraud controls (with MI and oversight). | Over 2023/2024, FCA will select a sample of firms that facilitate adviser charging and issue a questionnaire. |
| Transfer times | Firms should engage with the STAR initiative and should have sped up transfer times. | FCA data requests will monitor and ensure improvements in transfer times. |
| Due diligence over non-standard assets (NSAs) | Firms must have accurate records of their exposure to NSAs. Boards should have sought assurance on NSA due diligence and considered the need for remediation where failures identified. Firms should read the detail in the SIPP letter, have acted on FG20/21 and kept their wind-down plan up to date. | Proactive engagement with firms that hold NSAs to evaluate their assessment of potential liabilities. |
| Operational resilience | Firms need sufficient resources, contingency plans, and robust outsourcing oversight Firms should comply with PS21/3. | In Q4, FCA will request data from platforms on their PS21/3 compliance Firms may be included in additional exercises. |
| Emerging risks | ||
| Interest payments on cash balances | Platforms should consider how the economic environment, including rising interest rates, could impact consumer outcomes. | FCA will have “an immediate focus on retention of accrued interest payments on customers’ cash balances”. |
| “Gamification”/ customer trading | Controls and capabilities should help understand and monitor customers’ trading activities, and ensure customers are informed of relevant risks. | No specific work, but see NSAs above. |
Unsurprisingly, Consumer Duty is a focus throughout the letter—it's embedded within specific risk themes and has its own dedicated section. The themes are largely consistent with the January 2023 Consumer Duty letter to consumer investments sector. Firms should consider these side-by-side.
It's also noteworthy that the FCA says that if a firm believes part of its business is not captured by the Duty, this should be accompanied by “clear evidence”.
Fair value is a prominent feature but the other outcomes and cross cutting rules are also relevant. For example, concerns regarding transfer times raise questions about how the rule to “enable and support retail customers to pursue their financial objectives” is being met. The FCA expects that “in general, it should be at least as easy to exit a product as it is to enter”. When addressing this harm, firms should consider transfer times, their compliance with this rule and how they deliver good customer outcomes.
Key considerations for firms
Firms and their boards should consider the FCA's expectations in full, take care to consider them through the lens of the Consumer Duty, and prepare for supervisors' questions. Firms should be ready to supply relevant evidence, including around any areas where they have determined the Duty's requirements do not apply.
Firms should consider whether they can or will be able to evidence:
General level
- Consideration of all the harms identified by the FCA and any actions to address them.
- The outcomes of contingency plans testing.
- Robust governance and a culture that takes strong action in relation to inappropriate conduct.
- Engagement with the substantive requirements of the Consumer Duty.
- Compliance with the Consumer Duty requirements and a fully resourced plan to substantively embed the Duty.
Theme specific
- Robust technology, systems and controls and processes that are commensurate to the size of the firm and business operations.
- Effective and adequate oversight of third parties.
- Steps taken to reduce transfer times to deliver good outcomes in line with the Consumer Duty.
- The outcomes of fair value assessments and how different customer cohorts have been taken into account.
- How interest accrued on customers' cash balances have been considered as part of fair value assessments.
- How fees and charges are proportionate to the service provided.
- Analysis of exposure to NSAs alongside up-to-date valuations, calculation of potential liabilities, and Board assurance on the level of due diligence performed.
- A robust ongoing due diligence process for NSAs.
How KPMG can help
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To meet regulatory expectations on conduct and culture, we have developed a range of technology applications to support digitalisation and automation of control processes. These can be adapted to a range of use cases across front office and controls functions and help drive efficiency whilst maintaining conduct outcomes.
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