FCA letter targets retention of interest

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The FCA has issued a Dear CEO letter on the retention of interest earned on cash balances following recent supervisory work. The letter provides further evidence of how the FCA intends to use the Consumer Duty to target long-standing market practices where it has concerns.

While the letter has been sent specifically to investment platforms and SIPP operators, it reiterates some of the messages in the regulator’s recent combative Dear CEO letter to the wider wealth management sector, so all firms with cash balances held for clients would be wise to take note.

Retention of interest on client cash balances must provide fair value and be understood by consumers. And recipients of the letter are expected to take prompt and decisive action in response to its findings:

  • By 31 January 2024: Firms need to confirm to the FCA in writing that they have reviewed whether their approach is meeting the FCA’s expectations (set out within the letter). This needs to include specific information about the action taken and the firm’s approach to interest on cash balances going forward.
  • By 29 February 2024: Firms need to have made any necessary changes in light of the above.

FCA findings: Interest and retention

The letter notes that firms have seen a substantial increase in the revenue generated by interest earned on cash held as a result of a rising Bank of England base rate. This spans client money balances, as well as balances held on deposit via mandate and contractual arrangements. In June 2023 alone, the sample of 42 firms surveyed collectively earned £74.3m from this practice. The FCA has concerns that this is not aligned with the Consumer Duty.

The FCA’s work found that around 71% of the 42 firms sampled retain some of the interest earned on cash balances with the average proportion retained being 50%. 61% of the firms that retain interest also charge a platform fee to customers. The regulator also found that the availability and quality of disclosures made by these firms varied greatly, as did the reasons given for retaining the interest. Less than half of the firms sampled could give examples of actions taken in relation to interest in the context of the Consumer Duty.

Context of historic retention

This is an issue that has its roots in the past, in the context of very low interest rates and a set of rules that allow firms to retain interest earned on client money provided the approach taken aligns with the terms of the agreement in place with the client. Historically, many firms have retained interest because the amounts received have been negligible and, in some cases, it can be operationally more challenging calculate and pay interest due to clients. The reasons for retaining interest given to the FCA as part of their survey included covering the cost of managing the cash and to discourage long-term allocations of cash in platform accounts.

The FCA’s expectations when it comes to retention of interest

The letter details how the Duty applies to the retention of interest on cash balances and sets out the FCA’s expectations for firms. This includes the following:

  • Uphold fair value: Fair value assessments must properly consider whether the approach to the retention of interest represents fair value. This should include an analysis of the costs of managing the cash, how it benefits the customer and any wider considerations.
  • Ensure retained interest is reasonable: Where interest is retained in order to cover the operational costs of the service, you need to make sure the amount of interest retained is reasonable. This is unlikely to be the case if it “very significantly exceeds operational costs”.
  • Avoid ‘double dipping’: Firms should not retain interest and take an account charge or fee on customers’ cash
  • Clarity for consumers: Any retention of interest should be disclosed in a way that consumers can understand and equips them with the information needed to make effective and timely investment decisions.
  • Prevent foreseeable harm: If you have consumers who are holding large cash balances, it’s important to consider what communications are needed to help them avoid foreseeable harm: for example, in terms of signposting alternatives or highlighting the protection limits of the Financial Services Compensation Scheme.

Responding to the FCA

The amount of work required in a relatively short period shouldn’t be underestimated and for firms holding client money, the potential CASS impact should be factored in. Where interest is earned on cash held by a firm as client money and the firm changes approach to if or how much it passes on to clients, there are several things it will need to consider:

  • When and how often is interest received on the money? When does it become due and payable to clients under the terms of business? Are the right controls in place to protect it under CASS or discharge fiduciary duty at that point?
  • Where is the money received? And does it align with the CASS requirements around the normal approach to receiving client money?
  • For money retained by the firm, are there controls in place to ensure that money is not held under CASS protection from the point at which it becomes due and payable to the firm?
  • Do the client terms give clarity on the approach to interest on client money and do the terms align with the controls in place?

We can help

Bovill has specialist teams supporting a wide range of clients on the challenges inherent in implementing the Consumer Duty and safeguarding client assets. We can help you understand how you are affected by the contents of the latest letter and review your broader approach against the FCA’s Consumer Duty expectations.

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