The main focus of the FCA’s policy statement on new platform remuneration and cash rebate rules is designed to ensure that charges are clear and explicit so that investors using platforms can quite rightly make informed choices. The FCA’s strong stance on this is perhaps not surprising bearing in mind the recent introduction of the RDR.
Key highlights of the policy statement on platforms coming into effect on 6 April next year include the banning of cash rebates to customers for new business, although taxable de minimis payments of £1 can be made. Also a cash rebate from a fund manager can still be made, so long as this is rebated back to the client in the form of units and subject to a tax charge.
Fund rebates retained by platforms will be banned for new business.
The FCA has also amended the definition of a ‘platform’ to include firms that white-label a platform or provide custody services. In addition, the FCA has clarified that all rules will apply to both advised and non-advised platforms, and is currently considering whether to extend the rules to life companies and Sipp providers.
To its credit, the FCA has acknowledged that it would be difficult and costly for legacy assets to comply with the new charging rules in the 12-month time frame. So, in order to facilitate this transition, the FCA has included a ‘sunset’ clause giving legacy businesses up until 6 April 2016 to comply with the ban on retained rebates. After which time platforms will have to charge both new and existing customers. However, while this element of the FCA’s policy statement has been given the thumbs up by the industry, other policies have not been welcomed with such open arms. For instance, there have been concerns that not banning payments between fund managers and platforms to advertise may influence how such funds are promoted, despite FCA guidance against this.
Furthermore, the current introduction of a clean share class to accommodate the new unbundled charging models has been criticised for being potentially costlier to the end user than the old or ‘dirty’ share class. The introduction of an even lower-priced ‘super clean’ share class that helps maintain agreed commercial pricing advantages is adding to the list of concerns that suggests the FCA’s objectives on pricing transparency may not be as clear cut as originally thought, as players scrabble around to readjust their business models.
So where is all this leading in terms of platform use in the UK? Well, according to a recent report by Deloitte, the value of assets held on platforms is estimated to grow from about £200bn today to £600bn by 2018, which, if correct, bodes well for the health of the sector. Deloitte says this growth will be driven by continued demand from advisers who see platforms as an essential part of their RDR-compliant, fee-based business models. Indeed, we have already seen signs of growth in platform use in a post-RDR market environment.
Yet while the debate on pricing and share classes will continue to focus minds as advisers and providers look for sustainable business models, I believe further growth in platform use will also be guided by the quality of product offerings.
With more than 30 platforms currently available, there is little doubt that those able to compete on price alone will find it difficult to sustain such a model going forward, particularly with the likelihood of more overseas entrants entering the sector. Whether this results in a bout of consolidation is unknown, but it is certainly something advisers need to be mindful of. So what other specific issues should advisers be looking for during the next two to three years as the new policy rules bed in?
As FCA guidance makes clear, it is unlikely that independent advisers will find one platform to suit the needs of all clients, at least in these early stages of regulatory evolution. In terms of due diligence, the FCA has recommended a range of areas advisers need to look at when ensuring that platforms used meet the necessary requirements, including product selection, tax wrappers, functionality, accessibility and support. This gives advisers some important clues as to what areas will increasingly pop up as important factors when choosing a platform.
Segmentation
In particular, advisers will have to clearly segment clients in order to justify platform choices. After all, the regulator wants to see that advisers can explain why they have chosen a particular platform. Whether an adviser uses one platform or takes a multi-platform approach, there needs to be a clear link back to any given client.
The type of clients on a firm’s books may dictate what platforms are chosen. So clients who are more price sensitive may have simpler product requirements, while those with more sophisticated investments needs would require more rich functionality from a platform, such as model portfolio management or the option of varied tax wrappers.
This has led to some speculation about the growth in ‘guided’ rather than open architecture platforms. Indeed, a survey conducted in February this year by the European platform trade association, the Fund Platform Group, reported that while the vast majority of European platforms operated in an open architecture environment, with 82 per cent offering full open architecture, there was speculation that the appetite for open architecture was lessening.
In the UK, in particular, consolidation in the adviser market and the adoption of model portfolios – which are arguably guided architecture – perhaps herald a move away from open architecture. However, I agree with the report that natural selection offered by open architecture, which may or may not lead to a common choice of manager or product, is not the same as operating solely within a limited guided architecture market. So I believe that customer choice under the remit of open architecture is here to stay.
At least in the UK we are already seeing platforms rise to the challenge of an improved product offering with the inclusion of more sophisticated products such as Sipps. Furthermore, the insistence by the regulator on no restrictions on re-registration is likely to improve the ability of financial advisers to move to the most appropriate platforms easily and quickly. Although, at present, the lack of industry standardisation on re-registration technology is likely to create some bottlenecks in the immediate to short term.
In the medium to long term, better reporting as well as improved service and support issues will also begin to grow in importance for advisers. I believe service along with functionality will be quite a big differentiator of platform choice going forward.
As the market digests current regulations, those platforms that can cater for advisers looking for a more flexible approach to a wider variety of client needs – whether it is for income drawdown needs, managing model portfolios or more complex tax wrap requirements – will become harder for advisers to ignore.
Harry Kerr is managing director of Avalon Investment Services
Key points
■ Main focus of the FCA’s policy statement on new platform remuneration and cash rebate rules is designed to ensure charges are clear and explicit.
■ Current introduction of a clean share class to accommodate the new unbundled charging models has been criticised for its cost to end users.
■ Consolidation in the adviser market and the adoption of model portfolios may herald a move away from open architecture.
