Well, that was nice. A bit of sunshine, some cricket, and before you know it the kids are back at school. Summer's over, the day is done, and soon it will be winter.
In between all the fun of summer you might have missed that the FCA got a bit overexcited, publishing a small rainforest of printed material just in time for everyone to read on the beach. By the time you had ploughed your way through their latest thinking on Mifid, the asset management study and retirement income planning, you’d have digested almost 1000 pages. And then, to top it all off, came the terms of reference for the forthcoming investment platforms market study.
It’s probably reasonable to assume the average Illuminate reader has a decent understanding of platforms and will be using them to help deliver good outcomes to their clients. It’s also probably fair to say the FCA recognises this, not just of Illuminate readers, but of advisers more generally.
Most firms are using platforms to enable their advice proposition, not as their advice proposition, and it feels significant that the platform market study is being driven by the competition arm of the FCA rather than the supervision side.
It also feels significant that this work will be conducted at a relatively gentle pace. Responses to the terms of reference were due earlier in September, yet the final report won’t arrive until summer 2018. If the FCA has big concerns with platforms and how advisers are using them, it is going to take its time to sort it out.
We see little obvious consumer detriment for most clients investing via platforms, however there is still the nagging feeling that the market could be working more effectively.
The regulation surrounding platforms needs to more accurately reflect how advisers are using platforms and the range of services they can select from. The FCA currently defines 'platform service operators' as a service which:
1) involves arranging, safeguarding and administering investments, and
2) distributes retail investment products by more than one product provider.
This definition is still technically sound, however the market has moved on.
Broadly speaking, platforms fall into one of two camps, those who are agnostic about the end investment solution being adopted, and those who are not. Either one of these models is perfectly acceptable, however the consumer is likely to receive a different experience via each route. The regulation for platforms needs to be more specific, to ensure consumers who find themselves in either model continue to receive an acceptable outcome.
Central to this is the question of costs, value, and who benefits from the functionality on offer. The customer pays, yet in some cases the adviser benefits from improved business efficiencies. This begs the question as to whether perhaps advisers should pay for the platform?
Any discussion about a more equitable way of charging needs to consider the issue of cross-subsidies between large and smaller investors. In pure admin terms, platforms cost roughly the same amount irrespective of case size. A small investor could trade and phone for support frequently and a large investor might not.
Most providers are (or certainly should be) able to predict this behaviour and price accordingly. However, for larger cases there are additional costs that need to be factored in. As assets under management increases, so does the requirement for capital adequacy, and this comes at a cost. Larger firms are more likely to face increased regulatory supervision, increased FCA, Financial Services Compensation Scheme and professional indemnity costs, and larger firms are also taking on more risk. The more client money you manage the larger any potential regulatory sanction. While these are indirect costs, they are real and serve to demonstrate why the remedy of advisers paying directly for the platform is not perhaps the panacea some believe.
So, with a gentle pace of change this is an area advisers need to keep an eye on, but the good news is for most there is no need to be doing much, if anything, different. The market study will be assessing whether “advisers have a positive impact on the cost/quality of the platform, and these benefits are passed through to investors”. We speak with advisers all the time about various platforms, and we know this is in the forefront of their minds.
If it is, and you are having a positive impact to your clients, next summer should be a relaxing one. If not, winter is coming and that makes its the perfect time to catch up on some reading from the FCA.