8 January 2024

Explainer: Why the FCA is cracking down on retained interest

The UK’s Financial Conduct Authority (FCA) recently issued guidance to investment platforms and pension operators expressing concerns with how some firms retain interest earned on idle customer cash balances. This “Dear CEO” letter explains what information regulators sought, areas of noncompliance found, and steps now expected to satisfy FCA Consumer Duty rules.

Why the Letter Was Sent

The FCA surveyed 42 investment platforms and pension (SIPP) providers in mid-2023, requesting data on interest retention practices. This review assessed industry alignment with the Consumer Duty standards that took full effect last July. Focused on fair treatment and outcomes for financial consumers, the Duty establishes required behaviours and results.

The responses revealed inconsistent policies and disclosures around interest earned on customers’ uninvested cash deposits. With base interest rates rising for over 18 months, these platform balances generated £74.3 million last June alone. However, the FCA worries that the degree to which many firms share this revenue with underlying clients conflicts with Consumer Duty principles.

What Firms Must Demonstrate

The letter asserts that platforms retaining disproportionate interest sums likely violate Consumer Duty requirements to act reasonably and in good faith. Firms must now demonstrate through updated policies, conditions, and disclosures that the interest they keep:

  1. Fairly covers cash account administration costs as claimed in justifications
  2. Provides good value to customers in return for holding deposits
  3. Is communicated transparently so clients can understand associated value tradeoffs

As the FCA stated, “We expect firms to ensure where they retain interest on cash balances that they do so in a way that delivers good outcomes in line with Principle 12 and PRIN 2A and meets the Consumer Duty outcomes.”

What Changes the FCA Expects

The regulator expects investment platforms to thoroughly reassess and revise their approaches to interest retention under a Consumer Duty lens. Actions include:

  1. Ceasing “double dipping” practices of both retaining interest and charging cash account fees
  2. Lowering interest retention rates to reasonable, cost-covering levels
  3. Enhancing public disclosures surrounding cash balance policies and interest sharing
  4. Warning clients against holding excess cash lacking FSCS protection

By 29 February 2024, platforms must furnish new retention policies and confirmation of changes made for FCA evaluation. Firms unable to demonstrate Consumer Duty alignment risk prompt regulatory action until improved practices satisfy the regulator.

Recent posts
24 April 2024
The FTC's rule on non-competes: What you need to know
The FTC issued a final rule that alters the landscape for non-compete agreements in the USA. Here's MBK Search's guide to the new rule.
22 April 2024
Combating Elder Financial Exploitation: Key Insights for GRC Professionals
Elder financial exploitation (EFE) has emerged as a significant threat, with the Financial Crimes Enforcement Network (FinCEN) receiving reports of over $27 billion in suspicious activity between June 2022 and June 2023. As the population ages, this issue becomes increasingly pressing for financial institutions, regulators, and society.
17 April 2024
2024 FSB Recommendations to Boost Non-Bank Liquidity
16 April 2024
5 Ways the Internal Audit Code of Practice Will Transform the Profession
The Chartered Institute of Internal Auditors has taken a bold step towards revolutionising the internal audit profession in the UK and Ireland by releasing its draft "Internal Audit Code of Practice."