The FCA sets out its approach on client identity verification, supervisory flexibility over best execution obligations and 10% depreciation notifications, and financial resilience.

By Rob Moulton and Anna Lewis-Martinez

On 31 March 2020, the FCA published a Dear CEO letter to firms providing services to retail investors about COVID-19. The FCA makes it clear that it expects firms to provide strong support and service to customers during this period and that firms should be clear and transparent.

The Dear CEO letter covers the following areas in order to help firms during the pandemic:

Client Identity Verification Must Continue

The FCA expects firms to continue to comply with their obligations on client identity verification, but tells firms that they have flexibility within the FCA rules. The Money Laundering Regulations 2017 (MLRs) and Joint Money Laundering Steering Group guidance already provide for client identify verification to be carried out remotely and indicate appropriate safeguards and additional checks that firms can use to assist with verification. For example, firms can: accept scanned documentation sent by e-mail, preferably as a PDF; seek third-party verification of identity, such as from lawyers; ask clients to submit “selfies” or videos; and rely on due diligence carried out by others, such as the client’s primary bank account provider, where appropriate agreements are in place to provide access to data.

Supervisory Flexibility Over Best Execution Until 30 June 2020

The FCA expects firms to continue to meet their obligations, including their obligations on client order handling. The FCA also expects firms to take into account current market conditions when determining the relative importance they place on the different execution factors when meeting their obligations, and the venues or brokers they rely upon to achieve best execution. The FCA states that firms should consider their use of different types of orders to execute client orders and to manage risk during market volatility.

However, the FCA has no intention of taking enforcement action where a firm:

  • Does not publish RTS 27 by 1 April 2020, provided it is published no later than 30 June 2020
  • Does not publish RTS 28 and Article 65(6) reports, provided they are published by 30 June 2020

Supervisory Flexibility Over 10% Depreciation Notifications Until 1 October 2020

Firms providing portfolio management services or holding retail client accounts that include leveraged investments are currently required to inform investors where the value of their portfolio or leveraged position falls by 10% or more, compared with its value in their last periodic statement, and for each subsequent 10% fall in value.

The FCA has confirmed that it has no intention of taking enforcement action where a firm:

  • Has issued at least one notification to a retail clients within a current reporting period, indicating their portfolio has decreased in value by at least 10%.
  • Subsequently provides general updates through its website, other public channels (such as social media), and/or generic, non-personalised client communications. These communications should update clients on market conditions, explain how clients can check their portfolio value, and invite clients to contact the firm if they wish.
  • Or chooses to cease providing 10% depreciation reports for any professional clients.

The FCA has said that it will adopt this approach for a period of six months, until 1 October 2020.

Financial Resilience

The FCA published its guidance on financial resilience and prudential issues on 26 March 2020. The FCA wants to clarify how firms in this sector should treat government support schemes for financial resilience and prudential issues:

  • Government schemes to help firms through this period can be used to help firms plan for how they will meet debts as they fall due and help firms remain solvent in the immediate period
  • Government loans cannot, however, be used to meet capital adequacy requirements, as they do not meet the definition of capital

The FCA encourages firms and associations to sign up to its alerts and regulatory news roundup for updates and developments.