How you feel about this will depend on how important you think underlying technology is. From my point of view, I think it’s unlikely that we’ll immediately see the end of all instances of GBST’s Composer system, for example.
Clients have to be ready to move, and we’ve seen what happens when you rush it. So although it’s undeniable that the concentration in the market in the biggest outsourcer is increasing dramatically, the actual underlying systems will be a bit more diverse.
FNZ has also bought JHC, the software behind Figaro, which is a really popular system for stockbrokers, including lots of direct-to-consumer platforms such as AJ Bell Youinvest and Charles Stanley Direct. We’re used to tech firms like Apple and Google buying loads of other technologies; we just haven’t seen it so much in the retail investment space. But FNZ is flush with private equity, and I wouldn’t be at all surprised to see more acquisitions over the next few years.
Nonetheless, by the time we bring in the AUA from other channels it’s starting to get to the point where these businesses have more control over end-customer investments than any platform operator that you might favour with new business flow.
This inevitably brings in the question as to whether these providers should be regulated or not. My thinking is that they should. In fact, FNZ is partly regulated already for some of its activities. The other providers have also indicated their willingness in the past.
The thing with regulation – well, be careful what you wish for. It doesn’t come for free, and alongside oversight and potential additional investor protection will come further cost, which needs to come from somewhere, and I think we both know where that will be.
It’s also far from the case that each provider uses its outsource partner in the same way. This is particularly true of non-FNZ tenants. For example, Novia uses a great deal of what GBST has to offer through Composer, but creates some of its own technology on the side. Aegon similarly consumes lots of what GBST does.
But AJ Bell Investcentre, also a GBST client, uses only a little of what the software provider can do, having undergone a multi-year project to build its own kit around the GBST core. Arguably, then, this might mean that AJ Bell is much less dependent on its outsource partner than Nucleus is on Bravura, for example.
It’s easy to imagine that this might be something the stock market likes and which might be rewarded in the share price. Nucleus is now also building out more and more of its own elements around the Bravura core.