In a 110-page interim report on the state of the platform market, published today (16 July), the Financial Conduct Authority revealed its plans to make fund supermarkets up their game.
While competition was found to be working well for most consumers using investment platforms, the FCA's interim findings revealed concerns about how platforms compete for particular groups of consumers.
Given the rapid growth in this market, the FCA proposed measures to address these problems before they get bigger, and asked for views by 21 September 2018.
The watchdog plans to issue final rules at the start of next year.
For those who can’t face 110 pages of reading here are the four key takeaways from the paper for financial advisers– and what the regulator’s suggestions may mean for the way you do business.
1) Platform pockets laid bare
The platform service provider market has doubled since 2013 from £250bn to £500bn assets under administration (AUA), according to the FCA.
Adviser platforms collectively administer £311bn and are chosen by advisers but are paid for by consumers.
Despite some new entry, the FCA found the direct to consumer market remains concentrated, with a single platform having a market share slightly higher than 40 per cent.
In the adviser market none of the top four platforms achieves a 20 per cent market share and their market shares have changed in recent years.
Platform fees were found to vary so the FCA ruled it is important that customers understand what they are paying.
For example, charges on a pot of £5,000 investing in stocks and shares Isa were found to vary from 20 basis points to 240 bps, with a potential £650 difference in returns over a five-year period (assuming a 5 per cent growth rate).
2) Platforms need to enable easier switching
The FCA has revealed it is concerned about barriers being put in the place for advisers and their clients fed up of the service offered by some platforms who want to switch.
The switching process for investors was found to be complex and time consuming.
Almost half of consumers who have not switched nor considered switching platform are happy as they are but the FCA found that 7 per cent of consumers have tried to switch at some point but failed mainly because of the time involved, the complexity of the process and exit fees.
While the FCA stated it is not concerned about the rate of switching per se, what matters is the ability to switch – consumers should have the option even if they choose not to use it.
The time it takes to switch between platforms was found to generally take a couple of weeks to a few months, but it can take longer.
While advisers were found update their platform lists for new investments over time, the FCA found not many advisers switch existing investments as the process is complicated.
This means that even if there are better options, which advisers use for new clients, the FCA found they rarely switch existing investments across platforms.
Many advisers were also found to charge an extra fee for switching on top of their ongoing advice fee, which the FCA judged could cancel out the potential benefit of lower platform fees and act as an additional barrier.
To tackle this issue the FCA suggested the industry should publish data on transfer times so consumers and third parties can compare platform performance and put pressure on platforms to make improvements.
In a warning shot, the FCA said if the industry doesn’t speed up on switching it will look to ban exit fees and introduce rules requiring the ceding platform to switch consumers to the receiving platform’s share class before a switch takes place.
More guidance to clarify the FCA’s expectations for adviser charging for switching platform could also be introduced.
3) Platforms could keep tabs on you
The FCA has revealed it is concerned about clients who were previously advised but no longer have any relationship with a financial adviser, facing higher charges and a lesser service.
The regulator estimated there are currently just over 400,000 orphan clients with just over £10bn of assets on platforms and that the figure is rising.
The watchdog is worried orphan clients have limited ability to access and alter their investments on an adviser platform so are paying for functionality they cannot use.
While many platforms told the FCA they encourage orphan clients to find a new adviser or switch to a direct to consumer platform, some platforms also charge orphan clients extra fees, of up to 0.5 per cent on top of their pre-existing platform charges.
The FCA estimated that around 10,000 orphan clients are currently paying extra fees amounting to more than £1.2m every year.
To tackle this problem, the FCA told platforms to address price discrimination between orphan and existing clients.
Platforms were also told to have a process in place to get these customers to switch to a more appropriate proposition.
A requirement for adviser platforms to check, if there is no activity after a year, that their customers are receiving an advice service, could also be put in place.
The FCA stated it wants to be told about orphan clients who are still paying an adviser for advice they no longer receive.
4) Adviser charges and inducements tackled
Platforms generally do not appear to show advisers the individual and weighted average fund charges their clients are paying when they view client accounts, according to the FCA.
This means that, even if advisers are assessing fund charges from third parties when selecting funds, the FCA claimed platforms are not facilitating advisers’ ongoing assessment of whether the client is receiving good value for money from their portfolios.
Adviser platforms were told they could help advisers monitor whether their clients are receiving good value for money from their portfolios by showing the fund charges their clients are paying when they view client accounts.
The FCA also found that some advisers use services including the provision of some adviser education and training courses, white labelling, and bulk rebalancing and model portfolio management tools, which are likely to benefit advisers but not necessarily their clients.
Some of these services are likely to be so-called non-monetary benefits, so the FCA stated they are likely to be caught by the regulator’s inducement rules.
Advisers were told they need to demonstrate that these benefits are acceptable minor non-monetary benefits, for example because they can enhance the quality of the service to the client and will not impair the firm’s compliance with its duty to act in the client’s best interests.
emma.hughes@ft.com
