FCA sets out regulatory priorities for platforms

Out-Law News | 17 Feb 2020 | 2:53 pm | 2 min. read

The UK’s Financial Conduct Authority has set out its regulatory priorities for platform service providers in its latest ‘Dear CEO’ letter to firms.

In the letter (3 page / 169KB PDF) the FCA said it was focusing its supervision strategy on addressing three ‘key harms’: technology and operational resilience; third-party outsourcing, and conflicts of interest.

It also reminded firms that they may need to take action on the recommendations from the FCA’s Investment Platforms Market Study (IPMS), and consider how Brexit will affect their business.

Financial services expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law, said the FCA’s ‘Dear CEO’ letters were generally reminders to firms of actions they should be taking.

“In common with other recent letters, the FCA may not be raising new issues, but have made very clear what they expect of platforms portfolio firms in the areas of most concern to the regulator. Firms should use this letter as a checklist and to prioritise their areas of regulatory focus,” Ashby said.

Ashby said the warning to platform providers that their technology and operations need sufficient investment was an area of particular concern for the FCA, as customers are required increasingly to use firms’ systems to invest online. The warning follows papers on operational resilience published in December by the FCA, the Prudential Regulation Authority (PRA) and the Bank of England.

The letter also includes a warning to firms to ensure that any change projects to update or replace legacy systems need effective planning and project management, to ensure proper execution with the minimum disruption for clients.

“The warning echoes comments by the regulators in their operational resilience papers that firms should plan and prepare on the basis that unexpected problems will occur, focusing on the reducing the impact for customers affected by these problems, rather than expecting to avoid them.” Ashby said.

“Firms should set up their almost inevitable upgrade projects with care, with enough focus on customer impact and enough time built in to allow for a successful transition even if problems arise during the migration project,” Ashby said.

Ashby said third-party outsourcing was becoming more common among platforms as the platform technology market became more concentrated on a small number of providers.

“The FCA expects firms to have clear boundaries between their own responsibilities and those of the outsource providers, identifying an area where the boundaries can easily be blurred as platforms are set up in close collaboration with the system provider that is so vital to its operation. Even if a platform has been operating on a system for some time, firms should review these boundaries as part of testing their operational resilience,” Ashby said.

Following the IPMS, firms will need to implement new rules designed to make transfers between platforms simpler. The FCA said it would consider further action if consumers’ experience of switching did not continue to improve.

Platform providers also need to have effective day-to-day trade execution processes, contingent arrangements for periods of market distress and clear, comprehensive and effective oversight and monitoring, said the letter.