Clifford Chance

In its Dear CEO letter (12 December 2023) to investment platforms and self-invested personal pension scheme (SIPP) operators, the FCA has asked firms to confirm, by 31 January 2024 (with a backstop of 29 February 2024 for making any necessary changes), that they are (or how they will become) compliant with the Consumer Duty ("the Duty") in respect of their retention of interest on customers' cash balances.

This form of "proactive supervision" by the FCA has the objective of encouraging firms to make desired changes quickly, and certainly more quickly than would be achieved through taking enforcement action, consistent with the FCA's objective to be nimbler.

In finalising their responses, firms should consider some of the risks associated with responding to this form of supervisory tool.

1. A reminder of what the Dear CEO letter is saying

• Based on responses it has received to a recent survey of 42 firms, the FCA is concerned that some of these firms' treatment of their retail customers' cash balances may not have been in line with the Duty since it came into force on 31 July 2023.
• The FCA's focus is specifically on retail customers' cash balances including:
• client money balances subject to written retention (CASS 7.11.32R provides that "A firm must pay a retail client any interest earned on client money held for that client unless it has otherwise notified him in writing")
• balances held on deposit via mandates and contractual arrangements.
• The FCA has identified three key areas where the firms' approaches may be in breach of its rules:
  • Firms are retaining a high percentage of interest earned on customers' cash balances (of between 10% to 100%, and on average 50%) and this may not be meeting the price and value outcome or comprise acting in good faith as required by (Principle 12 of the FCA's Principles for Businesses, PRIN 2A.2.1-2, and PRIN 2A.4).
  • There is a widespread practice of "double dipping" whereby firms retain interest, at the same time as charging an account charge or fee on customers' cash. This may not comprise acting in good faith (honesty, fair and open dealing and acting consistently with the reasonable expectations of retail customers) as required by PRIN 2A.2.1 / PRIN 2A.2.2.
  • Firms' disclosures and communications to consumers about these practices may not be sufficiently prominent or clear, as required by PRIN 2A.5.3.

2. A reminder of what the FCA expect of firms in response to the letter?

• The FCA expects all investment platforms and SIPP operators in receipt of the Dear CEO letter to review their approach to the retention of interest on customers' cash balances in the manner set out in their letter and take action to address the FCA's concerns. Firms need to:
• Consider and, if necessary, adjust, the percentage rate of retention of interest on customers' cash balances in order to ensure fair value to the customers. Then confirm to the FCA any changes made or intended to be made.
• Revisit their fair value assessments (in line with the obligations in PRIN 2A.4). Including considering whether:
  • The retention of interest relates to the cost of managing cash (and what that cost is, and how it has evolved in recent years), how it benefits the customer, and any other relevant considerations.
  • The amount of retained interest is “reasonable” and aligns with customer expectations.
  • The amount of interest retained "very significantly exceeds operational costs”? If so, it is unlikely to represent fair value.
• Cease any 'double-dipping' and confirm to the FCA that this has been done or will be done.
• Review and, if necessary, improve any disclosures or communications to customers regarding retention of interest on cash balances. Provide to the FCA copies of:
  • Any website and customer literature improved as a response to the FCA's letter.
  • Terms and conditions relating to this issue, along with an explanation, "where these terms assert that the interest retained is designed to cover operational costs, the firm should provide an explanation to the FCA of how they have calculated what an appropriate amount of retained interest is to reasonably reflect these costs".

• The FCA also encourages other consumer investment firms with comparable business models who hold uninvested cash for retail customers to consider the expectations set out in the letter and, if necessary, take appropriate action.

3. Managing risks

Whilst this is a supervisory measure, firms should have a clear understanding of how the FCA intends to treat responses and the associated risks.

In the letter the FCA has made clear that where it finds responses and reviews that have not been as thorough as it would expect, and firms are unable to demonstrate they are meeting expectations under the Duty, particularly for fair value and consumer understanding, it will take appropriate action.

• "Appropriate action" in this case could include:
  Requests for further information and or justification of steps taken / not taken.
• Requests for individual attestations for senior management
• Other proactive supervisory steps such as:
  • Section 166 reviews
  • Early intervention to require action as a condition of authorisation
• Enforcement

Decision making process
As is clear from the letter, the FCA will assess both the substance and degree of the changes firms have made and the thoroughness of the review firms have conducted.

In finalising responses therefore, firms should make sure to include sufficient detail and supporting evidence (where this has been requested) to demonstrate the thoroughness of the review process. Questions the FCA will consider in reviewing the responses will include:

• Has there been appropriate governance and oversight around the review?
• Has the review considered all the relevant factors under the Duty?
• Do the relevant factors appear to have been given appropriate weight?
• Has the review process been appropriately documented?
• Is there sufficient explanation in the letter of the reasons for any changes made?

Where firms decide that no change, or limited change, is necessary the FCA will look particularly carefully at the review process.

Timing
The FCA has set a challenging timeline. The Dear CEO letter asks for a considerable amount of information by the end of January and for confirmation that any necessary changes to practices or communications be implemented by the end of February.

Whilst firms should make every effort to meet these deadlines, they should also bear in mind the risks associated with responding without sufficient detail in order to meet the deadline or committing to changes on an unrealistic timeframe. If firms require more time to provide further supporting information or to make necessary changes, they should inform the FCA.

Explaining changes
Firms will want to consider how to explain the reasons for any changes.

The FCA letter does not ask firms to confirm or acknowledge past breaches of the Duty. Rather, the focus is on asking firms to confirm what changes will be made (if any) and why.

In practice, if a firm's response does acknowledge a prior breach of the Duty but commits to appropriate remedial action the risk of the FCA using the response to take action against the firm for a breach of the Duty is likely to be limited. However, in similar situations firms have often explained that changes have been made to ensure compliance, rather than to remedy an existing breach. This preserves a firm's ability to defend itself should there be any enforcement action.