The relationship between advisers, the platform they choose for clients, and what they charge, is set to be front and centre in the regulator’s investigation into whether the platform market works for investors.
The Financial Conduct Authority has today (17 July) published a detailed outline of what the investment platforms market study will cover.
Competition, value for money and conflicts of interest are at the heart of the regulator’s investigation into a market which encompassed nearly £600bn in assets under administration in 2016.
Central to this is the role of financial advisers, and what factors influence the platforms they use with clients, and which clients ultimately pay for.
“When consumers receive financial advice, their financial adviser may also recommend a platform to use or may choose a platform on behalf of their clients,” the FCA paper stated.
“A principal-agent relationship therefore often exists between the consumer and their adviser.”
This is an arrangement in which one entity legally appoints another to act on its behalf.
In such a relationship, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act.
It is this potential for a conflict that the FCA will investigate – including whether advisers are passing cost savings where they benefit from competition in the platform market, onto their clients through lower charges.
“We will assess how [the principal-agent] relationship affects the competitive dynamic between platforms.
“We will explore what factors advisers prioritise when choosing, reviewing and deciding whether to switch platform, and whether platforms consider the end investor when competing to win business from advisers.
“We will also consider whether advisers pass the benefits of competition between platforms onto investors in the form of lower adviser and platform fees.”
The FCA will also look at consumer preferences and behaviour, which could see awkward questions for advisers used to making the decision about what platforms are best for clients.
Consumers “should be able to make informed choices which reflect their preferences”, according to the FCA paper.
“We want to understand the extent to which consumers are choosing platform services and products on platforms which reflect their preferences.
“We will explore the reasons for any significant differences between what consumers’ value and the outcomes they want, the choices they make and outcomes they receive.
“Potential reasons could include investors not being able to access the information they need to make informed choices, platforms leading consumers to make certain choices, or because there are real or perceived barriers to switching.
“We will assess whether there are barriers preventing firms providing consumers with the information, guidance and advice they need to make informed investment decisions.”
If the FCA finds competition is not working well, it may intervene to promote more effective competition.
It can do this in a number of ways, including: rulemaking, publishing general guidance, proposing enhanced industry self-regulation or introducing firm-specific remedies or enforcement action (under FSMA or the Competition Act 1998).