FCA: Forcing platforms to justify charges will reduce costs

FTAdviser spent a week gathering advisers’ most pressing questions on the effects of the new rules and put them to David Geale, the FCA’s head of investment policy and the man behind the policies contained within the paper. Here, we reveal his answers.

Q:How does the FCA respond to the argument that these regulatory changes will result in a higher total cost of investment to customers, especially those at the lower end of the market? It has already emerged that this is the case on some platforms.

DG: We are concerned that the current way that platforms are funded is opaque and makes it difficult for customers to understand how much they are paying for the platform service or to compare platforms. A platform charge will help ensure that consumers are clear about what services are being provided and how much those services cost.

Making the cost clear will allow consumers and advisers to compare different platforms and make a value-for-money judgement on whether a particular service is suitable. We believe that this will facilitate competition for the benefit of the consumer in the market and that this will be reflected in prices and services offered, since platforms will have to justify their charging structures.

This increased level of transparency will inevitably create a more competitive market

As all charges will be disclosed upfront and agreed in advance, consumers will know exactly what they pay for the service they receive. This increased level of transparency will inevitably create a more competitive market in which both advisers and consumers can shop around for the best deal.

So, in the policy statement we made clear that we do not expect these policy changes to be used by the industry as a reason for increasing the fees they are able to receive and the improved transparency in pricing and in competition should help ensure this.

Q:Does the FCA intend to abolish existing adviser trail commission on platform business by April 2016 in line with the ban on legacy rebates, or will platforms still be allowed to pay (‘pass on’) trail on existing business? If it is the FCA’s intention to abolish trail on platform business has it calculated the percentage of the industry they expect to cease trading?

DG: Pre-RDR, trail commission was a way that clients could pay for the initial advice charge and also for an on-going service. We expect trail commission to decline over time, given that new advice (except in limited circumstances set out in guidance in our handbook) must be paid for through adviser charges.

The guidance applies to both platform and non-platform business, and we do not intend to add to it at this time.

Q: Are there enough customers in the market with sufficient knowledge to self-invest to sustain the large number of execution-only platforms launched recently? How will the regulator ensure execution-only platforms aren’t attracting customers better suited to advised sales?

DG: The rules as set out in PS 13/1 also apply to those platforms where consumers invest directly without going through an adviser, as we have seen similar issues around transparency in the non-advised market. Reading across these rules to the execution-only platform market will help ensure that consumers investing directly via an execution-only platform will be treated the same way as those consumers investing through an adviser.

We want to see a competitive marketplace where consumers are at the heart of a firm’s business model.

The FCA’s objectives are to protect consumers, enhance the integrity of the UK financial system and help maintain competitive markets and promote effective competition in the interests of consumers.

We will monitor execution-only platforms as part of our supervisory activity to ensure that they are giving customers clear, fair and not misleading information to help customers to make the right choices for them.

Q: Do platforms need to get client authority when moving to a cheaper share class if there is no other action involved? What about if the platform imposes a new charge equal to the difference in price of the two share classes?

DG: In transferring clients to any new share class, the first duty of the platform is to ensure that they are operating in the best interests of their customers and treating them fairly. We would expect the customer to be clear on the terms of any transfer and the platform to be confident that the customer is content with the process.

Q: What will happen to clients who don’t accept new terms on an explicit platform charge? What is the default position if customers don’t agree to new rebate-free charging structures?

DG: This will be the decision of the individual customer - having been made aware of the costs of the platform service, customers can make the decision as to whether the service offered is right for them, in contrast to the current situation where clients do not know what amount they are paying for a platform, or some, mistakenly, think it is free.

Q: Why hasn’t the FCA set a more definitive schedule for reading the new rules across neighbouring sectors? How will the regulator deal with firms engaging in “regulatory arbitrage” to dodge the new requirements?

DG: In order to address level playing field issues, in CP12/12 we sought views on reading-across the ban on payments from product providers to firms distributing retail investments to retail customers which fall outside the definition of a platform. Following the responses received, we have said that we believe that this issue merits further consideration.

We will therefore consider these markets as part of our on-going work and will aim to consult later on any rules, where necessary.

Q: Should a platform collapse, what protection and help would be available to investors? Is there a solution in which the investments on the collapsed platform could be rapidly distributed to investors, or even to other platforms?

David Geale: If a firm authorised by the FCA fails there can be a number of circumstances that cause loss to investors. However, platforms will generally hold a client’s money and assets through a nominee company, a separate legal entity from the platform. This provides protection for the money and assets from the failure of the platform.

Additionally, when holding a client’s money and assets, platforms must follow the FCA’s client asset rules (Cass) to ensure that the client’s money and assets are ring-fenced from corporate assets so that they can be protected if the platform collapses.

If the failure of a platform does result in losses to the client money and assets held through a nominee company, the nominee company can claim on the FSCS on behalf of the underlying beneficial owners. The FSCS protection available will depend on the structure of the product and the contractual arrangements between the relevant parties in each case.