If you are a fan of Financial Conduct Authority (FCA) consultation and market study papers, the last month has been like your best ever Christmas, birthday, Easter and Father’s/Mother’s Day all rolled into one. The FCA awoke from its post-purdah slumber a few days after the 21 June election with its DB Transfer Consultation Paper.
The Asset Management Market Study final report, MiFID II final policy statement and Retirement Outcomes Review interim report all followed within a matter of days, unleashing a migraine-inducing 463 pages of reading on the industry. And as any true fan will tell you, you have got to read the supporting documents to get the full picture, and that is another 1,400 pages of regulation to wade through. Surely that would be enough to see us through the summer months?
Market study
The answer was no. On 17 July the FCA set out the scope for its Investment Platforms Market Study with the publication of a terms of reference document (taking the page count to 497, if you are counting). This paper marks the first stage of a market study into the world of platforms with an industry consultation open until 8 September this year. The FCA then aims to publish an interim report by summer 2018 which will set out preliminary conclusions and any potential remedies to address any concerns it might uncover.
The relatively gentle timeline of this work is probably a good indicator of just how concerned the FCA is with platforms and all those who use them. It is very clear that it is coming at this work from the point of view of wanting to create a more competitive market, as opposed to having concerns of any obvious consumer detriment.
Launching the study, Christopher Woolard, executive director of strategy and competition at the FCA, said: “With the increasing use of platforms we want to assess whether competition between platforms is working in the interest of consumers. Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice.”
A central theme to this work will be the impact of vertical integration and commercial relationships between platforms, asset managers, discretionary investment managers and financial advisers. The majority of the market now operates this way, with four of the top five platforms (by assets under management) falling into this camp. The FCA notes “these relationships have the potential to distort competition by encouraging platforms to compete in the interests of those with whom they have commercial relationships rather than in the interests of consumers”. Currently this is noted just as a “potential”, however the study will look at this in detail to see if the potential is indeed a reality. If it is, the second paper next summer could be a real humdinger.
For now, there are two big questions being posed. Firstly, how do platforms compete on price and quality of their services, and secondly, do platforms offer investors value for money? As tempting as it is to say “not very well” and “no”, there is clearly more to it than this, and the study proposes a number of topics to be explored in detail. The vertical integrators will no doubt be looking closely at the “commercial relationships”, “business models” and “customer behaviour” sections, and the technology suppliers will take a keen interest in the “barriers to entry and expansion” topic.
Key points
• On 17 July the FCA set out the scope for its Investment Platforms Market Study.
• A chief consideration is: how do platforms compete on price and quality of their services?
• Any discussion about charging needs to consider the issue of cross subsidies.
Adviser impact
Advisers will be pleased to note they have not been forgotten, and have their own topic to be explored. “The impact of advisers” topic will look at whether advisers have a positive impact on the cost and/or quality of the platform, and whether these benefits are being passed through to the end investor.
The question of who pays, and who benefits from a platform is often offered as an example of where platforms and the industry have perhaps not got things quite right. There are without doubt benefits for advised clients investing via a platform. Clients want safe and concise custody, and an environment where their advisers can manage their investments at the lowest total cost, therefore allowing the adviser to provide the service required.
Client fees
Clients are normally reasonable people, and are fine with their adviser making a profit as well – if you are investing for the long term you want your adviser to be around to support you, so this is perfectly cool. What is perhaps less cool are the adviser-facing benefits that the customer is paying for, or at least subsidising via their platform charge. Platform tools, bulk switching, reporting, adviser seminars and training are all available to advisers from a number of providers. Some, or even most of these will help the adviser improve the service they are offering their clients, but should the client be the only one who pays for these?
Any discussion about a more equitable format of charging also needs to consider the issue of cross subsidies between large and smaller investors. In pure admin terms, platforms cost roughly the same amount irrespective of case size. A small investor could trade and phone for support frequently and a large investor might not.
Most providers are (or certainly should be) able to predict this behaviour and price accordingly. However, for larger cases there are additional costs that need to be factored in. As your assets under management increases, so does your requirement for capital adequacy, and this comes at a cost. Larger firms are more likely to face increased regulatory supervision, increased FCA, Financial Services Compensation Scheme (FSCS) and professional indemnity costs, and larger firms are also taking on more risk.
The more client money you manage the larger any regulatory sanction. While these are indirect costs, they are real and serve to demonstrate why the oft-touted remedy of advisers paying directly for the platform is not perhaps the panacea some believe.
Market impact
In the meantime, the market study will be looking at whether “advisers have a positive impact on the cost and quality of the platform, and whether these benefits are passed through to investors”. We know from our conversations with advisers that this is a question they are frequently asking themselves.
Due diligence services have never been busier, and in part this is driven by the increased regulatory focus. It is also noticeable that most advisers have at least some concerns about the platforms they are using, whoever they are, with technology, strategy and leadership changes increasingly being raised as potential issues. Providers need to do more to help advisers answer these questions, and especially to ensure the cost and quality of the platform is clearly articulated, and the benefits are passed on to the end client.
Mike Barrett is consulting director of the lang cat
