The FCA is clearly a fan of giving the industry plenty of reading material to enjoy while on their summer holidays.
Last year we were treated to hundreds of pages of output from the Asset Management Market study (a real hoot, unless that is you work for an asset manager) as well as the terms of reference document for the Investment Platforms Market Study.
Now, 12 months on and a huge amount of consumer and industry research later, the interim report has finally been published. It runs to almost 400 pages of findings, which I’m sure everyone has read from start to finish. But just in case you’ve had better things to do recently, here are the things that advisers really should know about it all.
The FCA is one of the few financial regulators in the world with a core objective to promote competition within the markets it supervises, based on the belief that effective competition benefits consumers and the wider economy.
It’s fair to say not everyone believes this approach will actually work, but we are where we are. What this does mean is the tone and pace of the work is a bit more gentle than you might expect. This isn’t a supervisory exercise going after obvious consumer detriment, and in fact the supporting consumer research shows most clients are happy with the outcome they are receiving, from both advised and direct-to-consumer (D2C) platforms.
All of this means there is nothing for advisers to panic about. There are no imminent rule changes (or indeed a consultation for any potential rule changes), so if you are working with platforms you don’t need to make significant changes as a result of this paper, but there are a few themes you should be aware of.
Potential areas of non-compliance
There are some “potential areas of non-compliance with existing rules” identified within the report. These centre around non-monetary benefits, with adviser training, white-labelling services and bulk rebalancing services cited as potential problem areas.
Advice firms need to demonstrate these benefits are acceptable minor non-monetary benefits, for example because they can enhance the quality of the service to the client and will not impair the firm’s compliance with its duty to act in the client’s best interests. Since these are current rules (updated at the start of the year as a result of MIFID II) advisers should look to ensure they are compliant asap.
The FCA's concerns
Beyond these issues, the report identifies five groups of consumers for whom the FCA are concerned that competition is not working effectively:
1) Switching between platforms can be difficult Consumers who would benefit from switching can find it difficult to do so.
2) Shopping around can be difficult Consumers who are price sensitive can find it difficult to shop around and choose a lower-cost platform.
3) The risks and expected returns of model portfolios with similar risk labels are unclear Consumers using model portfolios may have the wrong idea about the risk/return levels they face.
4) Consumers may be missing out by holding too much cash Consumers with large cash balances on D2C platforms may not know they are missing out on investment returns, the interest they lose or the charges they pay by holding cash in this way.
5) So-called 'orphan clients' who were previously advised but no longer have any relationship with an adviser face higher charges and lower service.
Advisers will note the majority, if not all, of these consumers fall into the D2C market, although there are some crossovers into the advised world, especially for the orphaned group. The potential remedies could however impact advisers more widely. For example, tackling issues around platform switching should (eventually) lead to improvements in the process of moving from one platform to another, and the FCA is also posing questions about the advice process involved. However, as with most of the report, no change is imminent.
Scope and scale
As it stands this is already a big piece of work, touching on both the advised and direct platform markets. We think it would benefit from a more nuanced approach of looking at these markets separately, especially as the scope is creeping further into adjacent markets. The issue of model portfolio labelling impacts wealth managers, robo-advisers and traditional advisers, and the proposed ban on exit fees for platforms could also be one to watch. If consumers are told exit fees are banned for platforms, might they believe it would be the case for life companies as well?
So, on the assumption that the majority of folk reading this are involved in platforms in one way or another, probably as a user or provider, the good news is there is no immediate cause for alarm. The market is working reasonably well, and while there are some issues to address, consumers are mostly happy with the outcomes they are receiving.
What's more, with the final report not due until Q1 next year, any potential rule changes as a result of this work are a long way off.
If you want to read more then clearly the FCA’s own report is the best place to start, however we have recently published our own initial findings which you can download for free here