RegulationAug 2 2018

How to do platform due diligence

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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.

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.”

Making the move

However, as we have seen with large-scale platform projects, consolidations are not without other risks to clients, such as late payments. 

Mr Young suggests advisers need to take the business decisions of platforms very seriously when doing due diligence, and should not shy away from moving clients where it is suitable.

“There can be basic but huge problems – money not being paid, data going missing, and any changes in service, ownership, functionality and, potentially, pricing mean advisers do need to think about the implications for their own research and due diligence," he confirms.

“I have a real concern that despite the glaring errors made this year, too few advisers will change platform and move existing clients due to the inconsistencies and administration experienced around transferring from one platform to another."

If investors are “trapped” on a platform it does little to dissuade platforms from future errors, and could even embolden them to increase prices or at least keep them static, Mr Young argues.

He believes this would be akin to “lifeco lethargy” of years past.

This is precisely the dilemma experienced by Lee Coates, director of Ethical Investors, who has been struggling with the new Aegon platform and says his preference was to move his Cofunds clients off the new platform they have been migrated to.

“The job of moving over 1,000 clients [to a different platform] is just a nightmare and we cannot selectively say we will be nice to the rich clients and leave the poor clients with crappy admin. It is all out or all stay,” he says.

Questions to ask

So how do advisers approach platform due diligence in light of these risks of consolidation or complete collapse?

Duff and Phelps says, at the platform due diligence stage there is plenty advisers can ask about that will stand them in good stead.

“There is definitely a point around ensuring that due diligence on the service level agreements that are in place, that there is diversification of risk.

"When you outsource a key process, then understanding the risks and management of risks and the status and standing of the entity you are dealing with, is of fundamental importance,” said Mr Turner.

Chris Holmes, director of London-based Almus Wealth, keeps a very keen eye on the platforms he chooses to use at his firm. 

The managing director says he looks at the relationship between the custodian and the platform. 

Helen Howcroft is managing director of London-based Equanimity IFA, and agrees with Mr Holmes that you need to dig into the financial strength of a platform as well as where assets are held. 

In her due diligence process, platforms have been ruled out if they don’t give up the data necessary to establishing these things.

She continues: “We have to be able to do an audit trail as to where custody of those funds is.

"We do platform research on an annual basis and I know some we automatically discount because they will not give us the information we need, they will not release the audit trail to us."

Christine Dawson is a freelance journalist