One-stop shop companies that offer consumers financial products and advice face answering tough questions about the value for money they provide investors.
The Financial Conduct Authority has today (17 July) revealed an investigation into so-called vertically integrated firms will form a key part of its probe into a platform market which holds nearly £600bn of investors’ assets.
Vertically integrated firms have grown in size and number in recent years, as companies seeks to profit from every part of the investment value chain.
Some of the biggest names in financial services, like Standard Life and Old Mutual Wealth, run these types of models, where they own a platform, advice arm and fund management business.
Now the FCA – responding to red flags raised by the industry – will look into this newer type of operation to see if it is working in the best interests of investors.
In the terms of reference for its Investment Platforms Market Study, published today (17 July), the FCA noted: “The platforms market is becoming increasingly vertically integrated, with commercial relationships existing between platforms, asset managers, discretionary investment managers and financial advisers.
“These relationships have the potential to distort competition by encouraging platforms to compete in the interests of those with which they have commercial relationships rather than in the interests of the consumer.”
Specifically on commercial relationships, the FCA paper stated platforms potentially have the ability to influence and be influenced by other parts of the value chain which, in turn, may influence the value for money consumers receive.
“The way in which platforms negotiate with product providers may affect the outcomes consumers receive from their investment products.
“Some platforms are vertically integrated with adviser networks and asset managers.
“Others may negotiate with and enter into commercial relationships with product and wrapper providers and discretionary investment managers.
“Platforms also rely on research firms whose data and research they may use to decide which products to list and which to put into model portfolios and best buy lists.
“We want to understand how platforms interact with other parts of the value chain, what commercial relationships exist and how this may affect platforms’ incentives, the products they promote, the choices investors make and ultimately the value for money they receive.
“In doing so, we will compare the impact platforms have on investment products with the impact of firms offering similar services to platforms.”
The concern about conflicts of interest at vertically integrated firms was revealed in the Financial Conduct Authority’s final report into the asset management market, published on 28 June, which followed the watchdog's investigation into whether investment products consumers use offer value for money.
The regulator revealed it had been contacted by some in the financial services industry with concerns about vertically integrated firms, and committed itself to looking into the issue of providers seeking alternative routes to regain their influence on the retail market, following the introduction of the Retail Distribution Review in 2012.