Last month, the FCA published its interim report into the growing investment platform market in which its stated aim was to look at how competition is developing in this sector and the increasing role these platforms play in the asset management ecosystem and value chain.
The report focused on both advised and non-advised businesses and found a mixed set of findings with some positive aspects and some more concerning elements. We unpack their findings below:
- Switching between platforms can be difficult, complex and time-consuming and poses a barrier to customers switching to another provider
- Comparing pricing is difficult, in part due to the complexity of charging structures and fees but also due to poor presentation
- Risk and return labelling is inconsistent across platforms. Model portfolios with similar risk ratings across providers can have different assets and return volatility, also making comparisons difficult
- Customers inadvertently holding too much cash. The review highlights that platforms may be disproportionately holding too much of a client’s assets as cash, resulting in lower investment returns
- Orphaned Clients. Some clients on who are no longer actively advised may be paying for advice through historic pricing structures. The FCA feels this is unfair and should be more proactively addressed.
Our thoughts on what are to be the likely changes in the Q1 2019 final report:
- Limitations on exit fees to remove disincentives for switching. It is likely that the FCA will look to clamp down on any exit fees to remove the disincentive for customers wishing to change providers
- Improvements to presentation of charges on platforms. MiFID II has provided a great deal more information on cost and charges to the end customer, how easily consumable and comparable this information is the challenge. Whilst the FCA is unlikely to make further changes to the disclosure requirements they may very well provide guidance in the form of an extension to the work they conducted in 2016 around Smarter Consumer Communications
- Clear indications around expectations on orphaned clients for platforms holding their assets. At a minimum this would involve ensuring fees and charges for orphaned clients are fair given they are no longer receiving advice. In addition, there may be requirements to notify these clients that they should consider switching to a more appropriate proposition. It seems unlikely at this stage that the FCA will require platforms to play a more prominent role beyond this
- Guidance on appropriate risk labelling for products / portfolios. Expect guidance or standards around appropriate labelling of model portfolios, most likely a requirement to include more detail around asset allocation and strategy of these model portfolios to better inform customers about investment outcomes and the methods used to achieve these outcomes
- Guidance and likely time limits on investment switching between platforms. The FCA is watching industry developments around the Transfers and Re-registration Industry Group and its industry framework for transfers before moving making any clear action but may reinforce this body’s work in terms of formal guidance on time-limits and process.
Whilst the FCA has no major concerns about the competitiveness of the platform market there are areas where it will take action to improve customer outcomes. We will see what actions these are in 2019 when they publish their final report.