The UK Financial Conduct Authority (FCA) has outlined its regulatory priorities for online platforms over the next two years, in a letter to the industry.
Financial regulation expert Hannah Ross of Pinsent Masons said: “This letter for the platform industry repeats familiar priorities with a Consumer Duty focus, but also sets out new regulatory expectations for platform providers, such as in relation to key emerging harms and due diligence obligations.”
The FCA told CEOs that leadership teams should “fully understand the level of exposure” their firms have to risks including high-risk investments and poor operational resilience, and said it would consider whether firms have taken appropriate action to mitigate them in any future supervisory engagements. “The regulator makes it clear that it will take firm and assertive action where firms fail to address issues and cause actual or potential consumer harm,” Ross added.
Chris Riach of Pinsent Masons said that this expectation was part of the “continuous improvement cycle” that is central to outcomes-based regulation. He added: “Rather than telling firms how to do something, the expectation is that firms will monitor and adapt to root out harms and risks of harm. The FCA also wants to see firms making positive changes having started applying the Consumer Duty requirements – including regarding fees and charges.”
The letter set out a number of potential harms facing platform customers, including that fees and charges may not represent fair value; that there are insufficiently robust systems and controls to protect customers from investment loss/fraud/cyber attacks; that firms need to do more to reduce transfer times between platforms; and concerns about operational resilience.
The letter also highlighted how platform firms’ historic failure to conduct proper due diligence of ‘non-standard’ assets (NSAs) had led to customers holding unsuitable high-risk investments. The regulator told firms: “We 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.” The FCA here also warned against disorderly firm failure.
It also noted that firms have taken on high risk NSAs, many of which have turned out to be scams and led to significant consumer loss and that firms without sufficient resources to cover potential NSA liabilities will fail. “Where platforms did not carry out adequate due diligence on the NSAs they took on, they could be liable for the losses consumers have suffered,” the FCA wrote.
Ross said: “Platform firms should take notice that the FCA considers due diligence as central to these firms’ ability to comply with their Consumer Duty obligations to deliver good outcomes for retail customers and avoid foreseeable harm to them. Previously, we have seen the regulator focus on what due diligence means for SIPP operators, but now the FCA is also saying that platform firms more generally have due diligence responsibilities, regardless of whether other authorised firms are involved.”
“As in other areas of regulation, the FCA is putting the onus on boards to check that the level of due diligence undertaken is adequate: where it is not, boards should assess whether this has led to consumer harm and consider their potential liability, and then take appropriate steps to close any funding gap to meet these liabilities,” Ross said.
“We are seeing increased engagement from clients seeking to do the right thing in response to the identification of potential liability, as a strategy to manage regulatory risk and PR. Firms should expect the FCA to act quickly to require capital injection into them if any such funding gap is not closed,” Ross added.
The letter also set out the emerging harms that the FCA has noted in this area, regarding the treatment of interest accrued on cash balances and value assessments and concerns about the growth of online trading applications platforms. The FCA reiterated that platform firms should also have a clear value rationale for their approach to interest on cash balances, especially in view of increasing interest rates.
The regulator wrote: “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. Our expectation is that firms deliver fair value to customers and support consumer understanding in line with the requirements of the Consumer Duty.”
Riach said this was of particular concern in the context of client asset (CASS) rules. “The FCA’s comments here are a good example of where tick box compliance with CASS, which permits retention of interest on notice to customers, will not necessarily align with broader, outcome based focussed of the Consumer Duty,” he added.
The FCA also set out its concern that online trading platforms and their business practices are akin to “gamification.” It expects firms to have stringent systems and controls in place to effectively monitor customers’ trading activities, and for customers to be informed of relevant risks and protected from “reckless trading” and scams.
“This is a clear example of the new evidential burden contained in the Consumer Duty in that firms should be monitoring and proactively seeking to head off harmful activities. The FCA says that customers should be informed of relevant risks and protected from ‘reckless trading’ and scams, but it would be helpful to get clarity on what examples of conduct the FCA means here,” Ross said.
She added: “Firms should consider how they are supporting good outcomes in being able to monitor indicators of reckless behaviour. This taps into Consumer Duty themes – and provides a clear example of how far the new evidential burden may stretch and challenge firms.”
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