Regulator places platform due diligence to the fore

Many may well have heard of last year’s snappily titled paper, PS13/01, as there has been plenty written about it. The focus of the paper is on payments to platform service providers (retained rebates) and cash rebates from providers to consumers, and the rules took effect from April 6 2014.

From an adviser’s perspective this paper does somewhat raise the bar with regard to their obligations to carry out platform due diligence; it is the adviser who will be required to satisfy him/herself that a platform has met the requirements set out within the paper in the investments it makes available.

So what does that mean in practise and what options are available to help you?

A good place to start is with the regulator. In addition to the platform paper requirements, there are other documents and factsheets that should be studied.

The FCA guidance on centralised investment propositions sets out the expectations for suitability and the dangers of ‘shoehorning’. These requirements cover platforms in a wider context as much as any investment solution. The evidencing of individual suitability is all important.

This theme is reinforced in the FCA’s recent thematic review on delivering independent advice, with a clear statement on the use of a single platform within an advisory firm. The focus – in terms of independence and platform use – is very clearly on the adviser’s knowledge of the market and their ability to make informed, suitable choices.

The key is identifying the most suitable solution based on knowledge of the market and the client’s circumstances and needs.

It is important to consider your client bank. What range and type of services do you want to offer them and, more importantly, what will they value? This isn’t about segmenting clients into boxes, but giving them a range of services and propositions from which they can choose, thereby segmenting themselves. You can then start to consider what propositions or platforms can best deliver the services you require.

Having identified your service proposition, how many platforms have the functionality to power this proposition and for what cost?

Increasingly, this cost assessment is a vital step for advisers, in terms of time and money. If a platform does not have the reporting tools required, or they are not integrated into the system, then the cost of bringing in the tools and manually keying in the data will be an additional burden to bear.

It is important that any charge assessment is multidimensional, covering not only the headline costs of the offering, but also the costs incurred while delivering the required service to the client.

It is clear that the concept of ‘total cost of ownership’ has rightly become widely accepted as the most accurate method of comparing investment costs. Again, this needs a multidimensional view, with considerations made to the cost of purchase and the ongoing cost of ownership.

The impact of charges over time can have a devastating effect on the client outcome. The combination of inflation and the total cost of (ongoing) ownership can eat into a large part of the expected return, so it’s vital that the costs are reduced wherever possible.

How does the platform you use allow you to reduce those total costs to achieve the right outcome? The right decision regarding wrapper selection, taxation, investment and portfolio management can make the difference between success and failure.

Conducting platform due diligence in a structured and robust format, which will meet the requirements of the FCA, is no small task. The good news is that there are a number of external companies that can help advisers in this area, with varying solutions ranging from online tools to standard reports, through to full consultancy services.

Platform suitability is ultimately about ensuring the best outcomes for clients and platform providers must do their bit too.

Mike Barrett is platform marketing manager at Skandia

FCA: Platform payment rules

In its policy statement, payments to platform service providers and cash rebates from providers to consumers, the FCA listed a number of changes to be made to the Conduct of Business Sourcebook (Cobs), which came into force this month. These included:

Adviser charging and remuneration

A firm must not make a personal recommendation to a retail client in relation to a retail investment product if it knows, or ought to know, that:

• The product’s charges or the platform service provider’s charges are presented in a way that offsets or may appear to offset any adviser charges or platform charges that are payable by that retail client; or

• The product’s charges or other payments are maintained by the retail investment product provider at a level such that a cash rebate, other than a cash rebate permitted by Cobs, is payable to the retail client.

Requirement to be paid through platform charges

Except as specified in Cobs, a platform service provider must:

• Only be remunerated for its platform service (and any other related services it provides), by platform charges; and

• Ensure that none of its associates accepts any remuneration in respect of those services.

Examples of remuneration that should not be accepted by a platform service provider or its associates include (but are not limited to):

• A share of an annual management charge; and

• Any payment (other than a product charge or a platform charge) made to a platform service provider in its capacity as a retail investment product provider where the relevant retail investment product is distributed to retail clients by its platform service.

Client’s best interests rule and using a platform service

A firm that:

• Arranges for retail clients to buy retail investment products or makes personal recommendations to retail clients in relation to retail investment products; and

• Uses a platform service for that purpose

Must take reasonable steps to ensure that it uses a platform service that presents its retail investment products without bias.

Using a platform service when advising

A firm must not use a platform service as part of a personal recommendation to a retail client in relation to a retail investment product unless it has satisfied itself that the platform service provider, and its associates, only receive remuneration for business carried on in the UK which is permitted by the rules.

Distinguishing platform charges from product charges and adviser charges

A platform service provider must not arrange for a retail client to buy a retail investment product if:

• The platform service provider’s charges are presented in a way that offsets or may appear to offset any product charges or adviser charges that are payable by the retail client; or

• The product’s charges or other payments are maintained by the retail investment product provider at a level such that a cash rebate, other than a cash rebate permitted by Cobs, is payable to the retail client.

Providing additional units or payment in cash to a retail client

The Cobs rules does not prevent a platform service provider receiving a share of an annual management charge from an authorised fund manager if the platform service provider passes that share on to the retail client in the form of:

• Additional units; or

• Cash, provided that it does not offset or appear to offset any adviser charges or platform charges.

Source: FCA Policy Statement PS13/1