How to do platform due diligence

This article is part of
Guide to platform consolidation

How to do platform due diligence

For advisers, the hypothetical questions about who is or might be buying who in the platform market leads to more serious questions about which platforms are the most suitable for the firm’s clients. 

The business strength of the companies they are using is even more salient for many advisers after the saga of platform and discretionary fund manager Beaufort Securities, which took client cash with it when it collapsed.

Beaufort Securities entered financial difficulties and eventually the FCA placed it into insolvency earlier this year.

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PwC is the company charged with the administration process.

Clients and advisers have been angered by news those that were using the platform for larger portfolios may never get some of their assets back as they will need to be used to meet the costs of the administration process.

This is permissible in the case where the shortfall between the amount PwC can recover and the amount clients invested exceeds the Financial Services Compensation Scheme (FSCS) limit.

The FSCS confirmed on 31 July it will payout to most clients of Beaufort Securities in September.

One adviser, who wished to remain anonymous, says he has contacted the platforms he uses in order to find out if his clients were at risk of losing assets in the same way Beaufort Securities' clients could do.

He was unhappy with “unsatisfactory” answers from the platforms, which made no firm assurances they could rule out the same scenario, because he had previously believed client money rules, or Client Assets Sourcebook (CASS) rules, would have protected client cash.

Understanding the rules

Mark Turner, managing director, compliance and regulatory consulting at Duff and Phelps, notes advisers were looking for answers that were not there.

“The concrete answers advisers want back from platforms is not what the regulations actually say. They want to hear funds are not at risk under any circumstances, which is not the case,” points out Mr Turner.

Phil Young, managing partner of consultancy Zero Support, says the case of Beaufort Securities has brought home an uncomfortable reality about CASS rules. But he hopes this does not negatively impact new market entrants.

“The discovery that the rules of administration could trump client money rules will have come as a shock to many advisers," he explains. 

"In the past a lot will have innocently been incorrect in their answers from clients on this subject, especially where justifying the use of smaller platforms. 

“It presents a real problem for start-up platforms as it hugely raises the bar on financial diligence. One wonders if businesses like Transact and Nucleus would have been affected in their early years by this." 

"It would be a shame to see other innovators barred and less competition from new entrants,” he adds.

The sale of a platform to a consolidator carries much less risk to client assets than a collapse of the business, as Martin Askew, partner at Clarke Wilmott explains: “In the instance of a consolidation of platforms there would be quite a detailed forensic exercise undertaken at that stage and if a fund is short, then the acquiring party will want to flag that up, otherwise they are going to be acquiring the problem.”