PlatformAug 28 2018

Mark Polson: FCA platform study is a missed opportunity

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Mark Polson: FCA platform study is a missed opportunity

So you’ll have had your summer, as we say in Edinburgh, and I think we can all stop rain dancing now. Back to work you go, and no moaning.

When you’re back, you’ll find that your friends and ours at the FCA have done the regulatory equivalent of ‘chap-door-run’, which is to say they dropped their interim investment platform market study on our doorstep in July and promptly disappeared off on holiday. The scamps.

You’ve no doubt read about some things that were in it or not in it already, but this is first and foremost a platform-focused column and if you think I’m not going to write about it here you are very much mistaken.

Despite a year’s work and almost 400 pages of output, our main reaction to the interim report, together with its eight annex documents, remains this: ‘meh’.

An opportunity missed

So what’s our beef? To get to the heart of it, we need to go way back to the prelapsarian times of last summer. Then the nascent report’s terms of reference posed two headline questions:

  • “How do platforms and similar firms compete on the price and quality of the services and products they offer and the products over which they have influence?” and;
  • “Do platform and similar firms’ investment solutions offer investors value for money?”

Sadly, neither of these questions comes close to being answered in the interim report. We also felt the lack of a proper investigation into the really big themes in platforms, but I’ll come back to that. The report was further complicated by smooshing (technical term) the direct and advised markets together, which is understandable at one level, but profoundly unhelpful at another. In our summary paper (available to download from the Lang Cat website), we have attempted to de-smoosh the two markets and present them more logically.

Enough whining, let’s take a look at what we did get. The report identifies five groups of consumers for whom competition between platforms is not working well:

  • Those who would benefit from switching but can find it difficult;
  • Those who are price-sensitive but can find shopping around difficult;
  • Those who use model portfolios. The risks and expected returns of model portfolios with similar risk labels are unclear and can lead to confusion about how much risk they are facing;
  • Those who have large cash balances on direct platforms. They may not know they are missing out on investment returns and/or that they are paying charges;
  • Those who no longer have an adviser and are still on an advised platform, but may face higher charges and lower levels of service (referred to as ‘orphan clients’).

Satisfactory?

Before we get too negative, it’s important to note that the supporting consumer research (conducted by NMG) shows satisfaction with platforms is high, for both advised and non-advised customers. Breadth of investment choice rates particularly highly as an important factor, but charges carry the lowest satisfaction rating.

It is also important to note that there are other influences on satisfaction levels beyond the platform itself, with investment performance and the adviser relationships understandably being at the forefront of customers’ minds – and those customers naturally conflate all the different elements together. These issues are naturally more prevalent where there is no adviser present to tutor the client in the ways of righteousness. 

But the interim report also fails to reflect that, even among advised platforms, there are numerous differences between the various models. The impact of vertical integration is touched on but not fully explored.

The terms of reference asked: “Do the drivers of profitability affect firms’ incentives… and what are the implications for investors?” And for me, this is the biggest miss of all in the paper.

The right incentives

I’m interested in the incentive issue more than anything else here. I buy that re-registering assets in-specie is hard between platforms, especially in complex model portfolios, and that this reduces the velocity of money moving around the market. 

I get that some providers simply suck at admin, and that some fund managers still prefer carrier pigeon to daddy’s estate as opposed to automated transfer technologies. I get that the benefit of one platform over another is often marginal, and that it’s hard to get a client to pay for the time and effort involved. I get it all.

But I also note that none of the above issues seem to apply when a firm is acquired by a consolidator or a vertical integrator. At that point the money starts flying into the new solution like….I don’t know, a bat on amphetamine or something. The difference? It’s not the admin, it’s not the investment bit, it’s not that the client will stump up. So what gives? Could it possibly be that the incentives for the business owner(s) are proving stronger than the disincentive of the extra work? I think we should be told – and we weren’t. But we need to be in the final report.

Potential improvements

Speaking of the final report, here’s our prescription for what we’d like to see. It comes in five parts.

1. Switching between platforms

The ease with which both advised and non-advised clients can move between platforms touches on lots of juicy subjects, such as exit fees, share classes and transfer times. The snappily titled ‘Transfers and re-registration working group’ recently published a framework for improving things in this space, having been “encouraged” to do so by the FCA. We expect this to be agreed and implemented at pace and we’d like to see the final report reflect this.

2. Shopping around can be difficult

This one is aimed at the direct space, and while we would applaud moves to make it easier to shop around, in a world where 27 per cent of direct consumers either don’t think they pay platform charges or don’t know, perhaps more work is needed on clarity of charges disclosure first. Some of that big FCA research budget could be diverted into working up usable models for disclosure that don’t make everyone want to sit under a tree, rocking backwards and forwards.

3. Model portfolios

That consumers using these model portfolios (mainly via direct-to-consumer providers) may have the wrong idea about the risk-return levels they face also feels like an area in need of improved disclosure and clarity of information, rather than a standardised industry approach. Mifid II disclosure on advisory models will also drown investors in paper and this needs covering in terms of what good practice looks like in the regulator’s eyes.

4. Cash on platforms

I have mentioned this a number of times – the combination of low interest rates and platform charges means that if you are using a platform to ‘invest’ in cash, you are probably getting net negative returns as a result. It’s good to see this finally being recognised, but again some more encouragement on expected practice wouldn’t be the worst thing in the world.

5. Orphan clients

Platforms have always had a treating customers fairly obligation here, but it looks like the bar may be raised. The suggested requirement for platforms to check that clients are receiving an advised service could also be one to watch.

Encouraging signs

Overall, this feels like a study in need of direction. We’re 12 months down with very little real progress to show for it. But, there is good news and here it is: there are very few signs of obvious consumer detriment. As the paper notes: “Platform financial performance does not suggest widespread competition concerns in the market. We do not find sustained excess profitability and many platforms are loss-making.” This is in direct contrast to the asset management market study, with that industry’s average 36 per cent profit margins, and it is noticeable that piece of work moved much more rapidly than its smaller platform sibling. 

And finally, with 400 pages of research to digest, we also know a lot more about the market than we did before.

As it stands, it looks like the FCA has bitten off more than it can chew with this work. There should be separate studies for advised and direct platforms, and the advised work needs to account for adjacent regulation such as Mifid II, the competition study for non-workplace pensions, the asset management market study and the ongoing defined benefit transfer work.

All of which should probably keep everyone busy until next summer, when you can expect another regulatory knock on the door… but when you open it, there will again be no one there.

Mark Polson is principal of platform and specialist consultancy the Lang Cat