Category: Insights

Fund suspensions – product governance and conflicts management under pressure

Retail investors are once again being told that, because of a gated product, they don’t have the instant liquidity they thought they had. As a result of the Woodford headlines this month, the FCA are even more likely to challenge product governance processes as part of a forthcoming review. There are more cases starting to appear at other managers, so it’s worth getting your house in order now to avoid painful consequences.

It’s been more than ten years since the AIG Premier Access Bond mis-selling allegations. Woodford Equity Income’s woes mean the blame game is beginning once again. There are various factors that are particular in the Woodford Equity Income case. But the lessons will no doubt be picked up by the FCA when carrying out this year’s promised product governance supervisory work. The regulator will challenge the product governance and suitability processes of investment advisors and managers. They have also said that they will be looking at Best Buy tables, so there will be scrutiny over conflicts management as well.

Making sure product governance isn’t form over substance

At Bovill, we see a lot of product governance processes. Many appear simply to demonstrate  compliance with rules rather than properly considering and conveying the risks to the end investor within a certain product or service. This box-ticking approach will not be tenable in this post MIFID II world of transparency and increased fiduciary duties.

Six ways you can get ahead of the FCA’s review

The Woodford incident highlights a whole host of issues. But here are five steps you should consider to get ahead of the regulatory curve:

  1. Pay attention to the detail of the target market and liquidity needs
    If there is an increased risk of suspension or gating then this needs to be clear to investors and explicitly considered by advisors. Should you have discussed this risk at your products and services committee or other governance forum? Take care to compare apples with apples. When considering a FTSE100 tracker against a less liquid fund the investment horizon is crucial. The Woodford Equity Income fund is a long term investment and has a weighting to early stage technology – any advisor should include that factor in their decisions around target market and tactical suitability decisions. The target market says 3-5 years as the minimum investment horizon it also mentions potential liquidity constraints*. If there is a heavy weighting for a client who has immediate liquidity needs, does your investor put a priority always on immediate liquidity? How will you test and monitor this?
  2. Negative target markets affect appropriateness
    Firms are not required by the black letter rules to test appropriateness for vanilla UCITS funds. But The Woodford Equity Income Fund said that it would not be suitable for “Self-directed investors who are not able to evaluate the risks and merits of the fund”* – if a fund has an increased risk of suspension, how will convey this to your platform users so that they can make an informed choice? How do you test investor’s understanding of this point? The principle of customers interests must be considered here – should you be carrying out more detailed work amongst E/O clients?
  3. Beware ‘Top Pick’ lists
    ‘Top Pick’ lists are not advice, but they do involve an element of subjectivity and so need to have careful consideration and positioned with your E/O clients. Consider any conflicts, actual or potential, that need to be managed or avoided.
  4. Check your gifts and entertainments register
    Assess why you might have more entries with one manufacturer or distributer – does it indicate an overly cosy relationship? Are there any potential conflicts indicated? If so, look to the conflicts register and how you might avoid them – especially if you have a top pick list or buy list.
  5. Review your product shelf regularly
    Products change over time and the understanding of them changes, so you should review all products and services regularly and on trigger events. Responsibility for these reviews needs to be clearly allocated in the firm and tracked by the products and services governance forum.

 

Bovill can help

We can help you in any area of product governance. For example by:

  • assessing your product governance process and improving it to help put the client at the centre
  • assessing individual products and services to make sure that they meet the needs of you clients
  • reviewing past sales to ensure that they are within the target market
  • reviewing product literature to ensure that it meets the FCA’s expectations.

Halving revenue or saving on fines? FCA clamps down on PFOF for brokers

Bovill - Halving revenue or saving on fines

Payment for order flow has been a hot topic for some time, and the latest ‘Dear CEO’ letter to wholesale brokers underlined the FCA’s concerns. The letter – which effectively put the industry on notice – shone a light on a lack of structure, conflicts of interest and reduced competition. Reviewing and addressing these areas should be a priority in making sure you don’t end up in the Regulator’s crosshairs.

Payment for order flow – PFOF – is the broker practice of charging fees to both clients and the liquidity providers on the other side of a trade. As well as being a key part of the Dear CEO letter to wholesale brokers in April, it was included in the following MarketWatch and a previous Dear CEO letter in December 2017.

PFOF – issues highlighted by the FCA

The key issues, in the FCA’s view, are threefold. First, conflicts of interest are caused by the incentive for a broker to route flow to liquidity providers that pay a larger fee. Second, as a ‘pay to play’ system it reduces competition. Finally, few brokers appear to have clear, written policies and procedures for managing conflicts and recordkeeping, even though many claim to have informal structures in place.

The April 2019 paper helpfully develops their thinking, providing more detailed descriptions of the broking process and its impact for PFOF. In the FCA characterisation there are two primary transaction scenarios that need to be considered.

  • In the first, the broker provides “exclusive liquidity” for an individual client, giving that client a right of first refusal while negotiating with liquidity providers.
  • In the second scenario the broker does not provide exclusive liquidity. Particularly in less-liquid markets, they instead broadcast a potential trade to the entire market via screen, voice and electronic chat. This may be either the first action on a trade or may follow on from a failure to finalise an “exclusive liquidity” trade in the first scenario. No client has a right of first refusal and generally the order process follows the standard ‘best bid sees best offer’ model.

In the case of sourcing exclusive liquidity, the FCA has made its view entirely clear: that the conflict of interest that arises here is unmanageable and therefore that no PFOF should be charged. Where a trade starts as the provision of exclusive liquidity, but the client gives up their right of first refusal, that will be a key point for determining the ability to charge the liquidity provider.

Where there are still some trades which continue to charge both sides, there are steps you can take to meet the FCA’s concerns. You’ll need a clear process for identifying the capacity in which you are acting, for recording that for each trade, for ensuring that you’re acting in a way that is genuinely neutral, and for managing conflicts where they arise. You’ll need to be sure of your position. And you need to be sure that it doesn’t conflict with any of the scenarios the FCA sees as attempts to circumvent the issue.

All brokers should now be considering their arrangements in light of the FCA’s paper. In many cases, you’ll need to review each desk and trader’s broking practices individually, and determine how they fit into the FCA’s schema – if they fit at all! To stay on the right side of the new guidance, desks should be issued clear broking procedures, detailing how standard transactions are processed. Regular compliance monitoring should be put in place, to make sure that agreed practices are being accurately followed.

Helping wholesale brokers respond to the FCA Dear CEO letter

The Dear CEO letter pulled no punches in describing the industry as lacking commitment to regulatory compliance and identified four areas where their supervisory work will focus in the next two years.

This article is part of a series looking in detail at each of the FCA’s areas of concern to help you make sure you don’t end up in their sights.

Bovill is working with the broker community to respond to the FCA’s Dear CEO letter in a number of areas. We can provide a comprehensive healthcheck against all of the issues raised by the letter, and also regularly help firms to develop their regulatory compliance frameworks.

SFTR reporting for the buy-side – don’t expect the sell-side to save you

Bovill SFTR reporting

One month since the new Securities Financing Transaction Regulation (SFTR) reporting regime was published in the EU’s Official Journal, financial services regulatory consultancy, Bovill, warns that firms are at serious risk if they intend to rely on their sell-side counterparts to meet the new standards. It remains unclear whether the sell-side will even be willing to take on this new reporting burden for their clients – but even if they do, an oversight obligation will remain.

Bovill has drawn particular attention to the extra heavy lifting the new regulation will demand of smaller participants in securities financing transactions (SFTs) on the buy-side. What’s more, the need to update reporting systems is likely to prove costly, potentially pushing some to exit the SFT market altogether.

Damon Batten, Managing Consultant at Bovill, comments: “Early signs from the market are giving us some amber warning lights. We’ve seen already that the sell-side don’t always get reporting right for their buy-side clients under the existing EMIR regime. The onus for meeting the SFTR standards will therefore most likely fall on buy-side firms, who should begin work now to make sure that reporting is in place and functioning – whether that means taking on the responsibility themselves, or keeping tabs on the reporting being done on their behalf.”

SFTR seeks to increase transparency on SFTs between European counterparties, which includes the repo market and securities lending, along with commodities-based lending. With regulatory technical standards published in the EU’s Official Journal in April, the 12-month countdown has begun for firms to fully prepare.

The new regulation requires counterparties to SFTs – which include repurchase agreements, securities lending and sell/buy-back transactions – to report 153 data fields within a day of trading. Many of the required data fields are also novel to European financial regulation, adding further complexity to the process of data reconciliation between either side of a trade.

How to demonstrate DB transfer suitability

Bovill Neil Walking

Neil Walkling has been featured in Money Marketing explaining how to demonstrate DB transfer suitability.

DB pension transfer advice is the most complex and high-risk financial advice you can give. It can result in serious and irreversible consequences for clients, and for your firm if you get it wrong.

Read more to find out if you’re doing the right thing by your clients. If you’re not, the FCA will soon come knocking on your door.

CFTC Releases Inaugural Enforcement Manual

Enforcement Manual

The Commodity Futures Trading Commission (CFTC) Division of Enforcement (DOE) recently released its first public-facing Enforcement Manual. The Manual aims to increase transparency, certainty, and consistency regarding the CFTC’s investigation and prosecution of violations under the Commodity Exchange Act (CEA) and related regulations.

So, what does the Enforcement Manual do?

The Manual provides an overview of the DOE and sets out the general policies and procedures regarding the conduct of investigations, the prosecution and settlement of enforcement actions, and miscellaneous topics – for example, ethics, confidentiality and records management. The release puts the CFTC more visibly on par with the Securities and Exchange Commission (SEC), which first publicly released its Enforcement Manual in late 2008.

What does this mean?

The DOE’s process of conducting preliminary inquiries and investigations has now been formalized and made public. The Manual enumerates the sources from which DOE may obtain information about potential regulatory violations and emphasizes the CFTC’s cooperation with foreign governmental agencies – both in receiving details about cross-border conduct and in compelling production of documents or testimony from individuals located abroad.

Why should I care?

In addition to enumerating investigative procedures and providing insight into the escalation of an enforcement matter, the Manual details the policies regarding self-reporting, company accountability, cooperation and remediation.

The CFTC’s Whistleblower Program likewise comes into focus, whereby protections and awards are available to eligible whistleblowers who provide original information about CEA violations that result in monetary sanctions over $1 million. Notably, the CFTC’s immunity procedure set out in Section 8.1.2.4 of the Manual explicitly permits a witness in an enforcement matter who is concerned about civil or criminal exposure to seek an immunity agreement with respect to the testimony or information conveyed during a proffer session.

How we can help

Bovill has extensive experience in supporting clients to make sure that regulatory aspects are properly managed in advance of an examination or regulatory inquiry. As part of our Markets and Commodity and Derivatives services, we can help you understand your firm’s regulatory exposure and any examination implications, then deliver the associated organizational change and test the resulting systems and processes. We can also carry out a health check to see whether existing practices are being managed and monitored in a way that safeguards compliance and minimizes risk.

Target market assessments – checking your investment services

Target market assessments

If you’re a distributor of investment products and services, the product governance rules require you to review whether they are consistent with the needs of your identified target market. This not only covers specific investments, but also the investment services you offer – an area which is often overlooked.

It’s not just about new clients

For wealth managers and financial advisers who deal with retail clients, it’s important to test whether your clients are offered a service that continues to meet their needs. The rules don’t distinguish between existing and new clients so it’s important that you remember to review whether all your clients are still receiving the right service. If you find that they’re not, then you will need to take action to rectify this.

Using target market assessments to analyse client categories

Let’s assume that you’ve successfully created the target market assessments for the products and services that you offer.  The next challenge is to use them in practice to make sure your clients are offered the service that best meets their needs. All too often they’re shoehorned into something that doesn’t really fit. For example, if you’re a traditional wealth management firm, you may well offer a number of services . These could include bespoke discretionary management, a managed portfolio service, an advisory managed service, an advice and dealing service and an execution-only dealing service. If you’re a financial planning firm, perhaps you offer transactional advice, several ongoing advice options and use a centralised investment proposition. You’ll have no doubt thought about which types of clients are best suited to each service option. If you’ve clearly defined your client segments, based on their characteristics and needs, then it should be possible to identify any instances of clients not receiving the right service.

Using target market assessments to meet individual needs

The key question to ask yourself is whether your Advisers and Investment Managers are using the target market assessments to help recommend the best service to meet each client’s needs. We’ve seen plenty of examples where this is not the case. For example, certain investment managers tend to recommend a bespoke discretionary service for everyone, regardless of whether the client is in the target market. This is either because that’s the service they want all their clients to have, or because it helps them to hit their targets. As well as making sure that the most suitable service is recommended to clients, as a distributor you’re responsible for regularly reviewing whether the products and services held by your existing clients remain consistent with the needs of the target market.

Testing whether your clients are getting the right service

There are a couple of ways in which you could test whether your clients are being offered the right service:

  • As part of the annual review of your product governance arrangements – use this to ensure that you review all of your products and services and update your target market assessments. You should also review MI that tells you how many clients appear to be outside the target market for each of your service offerings. If you identify any issues then you’ll need to make changes to existing controls or introduce new controls.
  • As part of first and second line testing of the effectiveness of your ongoing suitability reviews for existing clients. When your advisers or IMs are reviewing an existing client’s objectives and financial circumstances, they should also be considering whether they are in the best service for their ongoing needs. For example, is an advisory managed service still right for a client who rarely accepts investment recommendations? Why is a client whose portfolio has shrunk to £50,000 invested in a few collectives still in the bespoke discretionary service? Can you see evidence on the client files that your advisers are reviewing whether clients are still in the right service and, where appropriate, are they recommending a change of service?

How we can help?

Whether you’re a manufacturer or distributor, we can help you to apply the product governance rules to your business:

Target market assessment

The target market assessment needs to be detailed enough to allow you, as a manufacturer or distributor, to identify when a product or service is not compatible with a certain type of client. If you’ve not yet carried out a target market identification exercise for each of your products or services, we can help you get it done.

Target market validation

Where you’ve already completed one, we can help you to validate whether, in practice, the business is delivering into the target market, by assessing the controls you have in place as well as the products and services being distributed.

Product governance health check

Using our MiFID II health check tool we can review how you’ve implemented the product governance obligations using a set of questions that focus on key activities – including testing your compliance with the rules around target market identification. We’ll let you know how you’re doing against your peers and highlight any areas that need further work.

Client money – when it pops in uninvited

CASS firm

Finding you’re holding client money without meaning to can happen more easily than you think. Whether you’re a CASS firm or not you should make sure it doesn’t happen to you, and if it does, report it.

At Bovill, we’re seeing a definite focus from auditors on times when firms might be holding client money inadvertently. It’s something that affects firms both with permission to hold client money and those without.

Overpayment

Picture this: you’ve invoiced your client for their monthly fees but for some reason, you’ve invoiced them £100 too much – whether it’s because of system issues, fat fingers or maybe just a lapse in concentration. Your client is trusting and pays the invoice in full and on time. As a result, you end up
with £100 that you shouldn’t have had. £100 that rightly belongs to your client.

An alternative scenario – your client decides they’re going to pay their fees ahead of time, so maybe you receive two months’ worth of fee payments in one month. So you end up with an amount of money that isn’t yet due and payable to you. An amount of money that rightly belongs to your client.

Assuming the services you provide to your client fall within those covered by CASS 7 (primarily designated investment business and MiFID business), then that those amounts will be client money and as long as an exemption doesn’t apply, it should be covered by CASS 7 protection.

Compensation

A similar issue is that of complaint compensation. Something went wrong, your firm was at fault and you’ve agreed to pay compensation to the complainant. If you don’t specify when that compensation will be payable to the client, it could be argued that it’s due and payable at the moment you agree to pay it. If you don’t pay it out at that moment, then you could end up holding money that rightfully belongs to the complainant, which is also likely to be your client. Assuming again that the services complained about fall within the remit of CASS 7, then you have a client money breach.

Once might be misfortune, more than once is careless

These issues are being picked up by auditors more and more frequently. For firms with CASS 7 permission, it means they’ve held client money outside of the protection that it’s due and for non-CASS firms, it will mean that they’ve held money without permission. A one-off incident is likely to be overlooked as an error, it gets corrected and controls put in place to stop it happening again. If it happens more frequently, then it could be argued that the firm has a control failing, which could indicate wider issues. Either way, having a breach reported where client money has been held either without protection or without permission is never a good place to be.

If you’re a CASS firm…

If you’re a CASS firm, it’s always wise to identify all instances where client money or custody assets might arise within your firm. Carrying out a total capture exercise can help focus attention exactly where it’s needed and make sure that all client money is protected appropriately.

If you’re not a CASS firm…

If you’re not a CASS firm, take some time to think about the parts of the rule book that don’t apply to your firm and make sure that there is never a circumstance where they might inadvertently apply. That might be looking for times where you might end up with client money outside of the normal course of business, or it might be identifying instances where the mandate rules might apply.

Whatever the circumstance, it’s always advisable to report any breaches like those outlined above to the FCA as soon as they’re identified. It’s far better for a firm to have self-identified a breach, disclosed it fully and honestly and taken steps to correct and prevent it, than for the audit report to be the first the FCA hear of it.

FCA ups the pressure on wholesale brokers

wholesale brochures

Two publications in the space of two weeks give a strong indication that the FCA continues to be dissatisfied with the approach to compliance in the wholesale brokers sector. As a result, wholesale broking firms can expect ongoing scrutiny, and additional regulatory thematic work, over the next two years.

First out was the FCA ‘Dear CEO’ letter, which included a strong statement for brokers. According to the letter, ‘brokers in wholesale markets have made less progress than other sectors in embedding a culture of good conduct, and so action to raise standards across the sector has become urgent.’ The letter identified four key areas where wholesale brokers are often seen to be deficient:

  • Remuneration – some compensation arrangements incentivise poor conduct, and don’t properly balance financial outcomes with other qualitative factors
  • Governance – firms may fail to balance the individual power of highly successful brokers with the need for appropriate senior management and board oversight
  • Trading capacity – trading arrangements are often complex, and firms are perceived to have poor visibility of the trading capacity in which they are acting for individual transactions. (For example as the trade agency, matched principal or on an OTF)
  • Financial crime and market abuse – the FCA has identified a complacent attitude amongst brokers when it comes to their obligations to prevent financial crime and detect market abuse. At the same time, the Regulator believes the risk faced by firms is inherently high, particularly for market abuse.

Hot on the heels of the Dear CEO letter, came the FCA’s report on Payment for Order Flow (PFOF). The report focused primarily on technical interpretations on the broking process, and the implications for PFOF resulting from different broking practices. The conclusion reached was that, while many firms have notionally stopped making PFOF, there are pockets of non-compliance, and a poor understanding of how PFOF may arise in certain trading scenarios.

None of the issues raised in either document are new –  indeed many have been raised repeatedly by the FCA over the past five years or more. As such, there is a sense that the risk of regulatory censure for firms still failing to comply is rising.

If you’re a wholesale broker, you should have a look at your compliance controls as soon as possible to make sure you meet the FCA’s standards if they come calling.

Transaction reporting – no excuses

Market watch

In the latest Market Watch, the FCA have fired another warning shot to remind firms of their obligation to get transaction reports right. Following the recent enforcement cases, this should give a clear message to all firms that transaction reporting is high on the FCA’s agenda and there are no excuses for getting it wrong. And given the Regulator can see your reporting activity without asking, it’s certainly not an area to fly under the radar.

Within the detailed notes and observations of April’s Market Watch on market conduct and transaction reporting issues, there were three key questions for firms:

  1. Are you making common mistakes?

The FCA highlighted common mistakes they have observed so far:

  • Reporting of trade time – in Market Watch, the FCA emphasised the need for firms to use UTC (Coordinated Universal Time rather than, for example British Summer Time) and make sure clocks are properly synchronised.
  • Price – this should be reported in the major currency (pounds), not the minor currency (pence).
  • Venue – the segment MIC should be the standard with the operating MIC only used when segment MIC is not available. The FCA also reiterated that if firms have had reports rejected on this basis, they are obliged to cancel, correct and resubmit them.
  • Party identifiers – firms commonly mix up the buyer and seller and get natural person identifiers wrong.
  • Instrument reference data – there are a number of common issues with this field, including problems with the validity of the data at trade date, maturity dates being inconsistent with prospectuses and incorrect issuer LEIs being used.
  1. Are you running reconciliations?

The presence of these issues brings us to this next question. How would you know about such problems if you aren’t crunching the data? The publication reminded us not only that reconciliations are now a requirement but also that the FCA aren’t guessing when they say that firms are falling short. They can see who has requested the data necessary to run a reconciliation. You can be sure that if the FCA ever asks you if you’ve run the numbers, they already know the answer. So, if your reconciliation is still on a lengthy to-do list, now is the time to bring it forward.

  1. Are you talking to the FCA?

MiFIR requires firms to cancel, correct and resubmit transaction reports when they identify errors or omissions. The FCA have noted that this isn’t happening in all cases and reiterate that without accurate and complete data, their ability to carry out effective market abuse surveillance is impeded.  When errors or omissions in transaction reports are identified, firms must notify the FCA. But the Regulator is concerned that firms are correcting reports without notifying them of the errors or omissions identified using the correct notification form. This reflects what we saw in the response to our recent freedom of information request. The FCA reported that they received only 1,335 error and omission notifications during 2018, although it should be acknowledged that some firms report multiple issues in a single notification. And as with reconciliations, remember that the FCA can see your activity. They can see if you’ve never cancelled a report and may be slow to share your confidence. They can see if you’ve cancelled a stack of reports but also not notified them of your errors. Don’t try to fly under the radar – an open approach with the FCA will save you pain in the long term.

Once again, firms should take note – not only of the specific issues detailed in the Market Watch document issued in April 2019, but also of the need to reconcile reports to make sure they’re complete and accurate.  Any errors or omissions identified must be reported to the FCA in addition to cancelling, correcting and resubmitting reports.  More guidance on how to reconcile your transaction reports can be found here.

The outlook for peer-to-peer lending firms in 2019/2020

P2P

The FCA have published the 2019/20 Business Plan outlining their sector and cross sector priorities for the next year. While the plan is for the industry as a whole, it is clearly relevant to P2P firms, particularly given the Regulator’s increased focus on the sector. The FCA began regulating P2P in back in 2014. Since then it has:

  • conducted a Post Implementation Review (PIR)
  • consulted on proposed new rules and guidance as a result of the PIR
  • issued a Dear CEO letter to all firms in the sector requesting a review of the wind down arrangements in place.

Given this high profile, it is important for firms to ‘keep their house in order’ and ensure they are aware of the Regulator’s priorities.

Culture and Governance

Good governance has been a longstanding focus of the FCA. Firms are required to ensure that they have robust governance arrangements in place to promote a healthy culture and drive appropriate behaviours. This focus continues with the implementation of the Senior Managers and Certification Regime (SMCR), which will be extended to firms in the peer-to-peer lending sector in December 2019. As a result, senior managers will be responsible for driving positive customer outcomes and held responsible where things go wrong.

The FCA has a particular focus on P2P, highlighting the importance of ‘good governance and orderly business practices’ in the recent paper CP18/20. The key proposals for governance related changes require firms to:

  • have appropriate wind down plans in place
  • establish independent Compliance, Risk and where appropriate Audit control functions
  • implement a risk management framework
  • encourage director level responsibility for risk.

The FCA is committed to protecting consumers from the harm caused by “platforms’ complicated business models and poor business practices. So further review work in this area should be expected.

Operational Resilience

The FCA (alongside the PRA and Bank of England) highlighted operational resilience as a key issue in their July 2018 discussion paper, and it continues to be a focus in the 2019/20 plans. Ensuring continuity of service, and safeguarding data is a core requirement for all firms. While these failures had many different triggers, there are often common causes:

  • Lack of engagement from senior management. Operational resilience is too important to be left to operations and IT. Boards and Excos should review relevant MI (uptime, capacity, near misses etc), and demonstrate they understand the issues, and have taken appropriate action.
  • Risk landscapes which are too narrowly drawn or fail to fully quantify the impacts.
  • Lean programmes which have become dangerously underweight – with cost cutting exercises resulting in insufficient resources to maintain adequate services (under BAU conditions and in times of stress).
  • Inadequate oversight and control of change management programmes.
  • Insufficient due diligence, and ongoing monitoring of third party suppliers.

Bovill’s prudential expert, Harpartap Singh highlights some of the key issues: ‘In a recent Dear CEO letter, the FCA has raised concerns about the level of wind down planning carried out by loan-based peer-to-peer crowdfunding platforms. Although the wind down planning guidance was introduced in Q4 2016, many firms have not gone any further than putting in place business continuity plans and vague, non-specific “plans”. The FCA also highlighted the obligation to notify lenders of the wind down arrangements in place, especially if they involve another firm taking over the management and administration of the P2P agreements.’

The letter outlined the following expectations:

  • Firms will need to take reasonable steps to ensure continuity in the administration of P2P agreements should they need to wind down
  • Firms will need adequate cash reserves to cover the costs associated with wind down
  • Where firms commission third parties to assist with the wind down, they will need to ensure they have the appropriate regulatory permissions.

A recent review of P2P firms’ arrangements “strongly suggest” that some firms may struggle to meet the Regulator’s expectations. Three areas require urgent attention:

  • Systems and controls relating to wind down – these need to be very firm specific, including clarity on governance, when a wind down would be initiated, due diligence on back-up service providers and details of IT system continuity and availability of technical staff
  • Platform funding and remuneration models – firms need to consider whether their income streams would be sufficient to carry out a wind down or whether other arrangements need to be put in place
  • Third party permissions required for wind down – the firm(s) which would take over the administration of P2P agreements must have the relevant regulatory permissions

Harpartap adds ‘the FCA will be asking a sample of firms to submit their revised wind down plans for review. In the circumstances, firms should carry out an immediate review of wind down plans. This may be the time to get external help to ensure that the plans are compliant with the current guidance and leave you in a good place for when the new rules come out.’

Fair treatment of customers

In the 2019/20 plans, the FCA focuses on fair treatment of ‘existing’ customers – which is a particular focus for the insurance sector. But all firms should be looking at customer outcomes, throughout the lifecycle, from new business to end of life. In particular in the P2P where there remain challenges:

  • Ensuring customers fully understand the products they are purchasing
  • Keeping customers informed on changing risk profiles
  • Being able to demonstrate fair value
  • Adhering to CONC requirements (for sales and collections), when consumer lending is offered
  • Managing potential conflicts of interest between different classes of investors.

Next steps for P2P lending firms

The Business Plan is there to give insights into the FCA’s mindset and direction of travel. Firms should review the document and consider the elements relevant to their businesses.

Whatever your sector, it is clear that culture – and the associated requirements under SMCR – is a cross-sector focus that will underpin much of the Regulator’s approach in the future.

  Download our “Outlook for peer-to-peer lending firms in 2019/20” PDF