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City watchdog investigates fund supermarkets

Financial Conduct Authority launches review of online investment platforms to determine whether they offer investors value for money.

City watchdog investigates fund supermarkets

(Update) The City regulator has announced a review of online fund supermarkets to ensure the investment platforms they are helping investors make good financial decisions and are value for money.

The use of online platforms, which give direct access to funds and shares, has grown exponentially over the past eight years with assets ballooning from £108 billion in 2008 to £592 billion last year as both financial advisers and private investors have adopted them.

Launching its study the Financial Conduct Authority (FCA) said that platforms can ‘add value through the way they provide access to investment products and exposure to markets’, but added it wanted to ensure platforms ‘use their bargaining power to negotiate good deals for investors’.

It also wants to ensure the ‘model portfolios’ being offered by platforms and whether these are benefiting consumers. Model portfolios are ready-made portfolios of funds that meet certain investment objectives or target a certain level of investment risk.

Self-directed 'DIY' investors can use the tools on platforms to determine their own risk tolerance and investment objectives after whihch they guided towards specific model portfolios.

‘Through the market study we will diagnose whether platforms’ tools and investment solutions are meeting investors’ expectations in terms of the way they are explained and the value they offer,’ said the FCA.

It is also concerned that the platform market is becoming ‘increasingly vertically integrated’, which means there are commercial arrangements made between platforms, asset groups and advisers, which may impact impartiality.

‘These relationships have the potential to distort competition by encouraging platforms to compete in the interests of those with which they have commercial relationships rather than in the interests of the consumer,’ said the FCA.

The new review follows the FCA’s completion of its study into fund managers where it is pressing ahead with plans for an 'all-in' fund fee in a bid to tackle, what it described as 'weak' price competition. 

Christopher Woolard, executive director of strategy and competition at the FCA, said the review intended to ‘assess whether competition between platforms is working in the interest of consumers’.

‘Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice,’ he said.

The regulator will publish an interim report by summer 2018.

The debate around platform pricing and value for money is a long-running one. Recent attention has focused on a pricing war between Hargreaves Lansdown, which operates the UK's biggest fund supermarket, and US tracker fund giant Vanguard which is  targeting DIY investors in the UK for the first time.

Deep-pocketed Vanguard capped its account fee at just 0.15% a year on the first £250,000 invested, and will not apply a platform fee on sums over £250,000, meaning the most investors will have to pay is £375 a year.

Added to this, the average ongoing charge figure for Vanguard’s tracker funds is just 0.14%, taking the total yearly charge to 0.29%. The costs undercut Hargreaves Lansdown’s Vantage platform, which looks expensive in comparison at 0.45% a year for the first £250,000 invested.

Tom McPhail, head of policy at Hargreaves Lansdown, was not concerned about the direction of the FCA’s review but said he was surprised by its ‘broad scope’, which brings in not just traditional platforms but also life companies, wealth managers and banks into its remit.

He noted that the different types of online portals meant the FCA had a big task ahead but the regulation of investment platforms had to be consistent.

‘If it quacks like a duck and walks like a duck, then it should be regulated like a duck,’ he said.

Billy Mackay, marketing director of AJ Bell, which runs the Youinvest platform, wants the FCA to go further than just ensuring regulation is aligned. He called for the regulator to use the review to reverse the ban on payment of cash rebates from fund managers to platforms.

In 2013, the FCA stopped platforms taking a commission, or rebate’ from asset management companies in a bid to improve transparency and prevent investors from thinking they were getting a free service, when in fact they weren’t.

However, platforms argued they would not be able to get the best deal for customers or offer discounts to loyal customers.

‘One key focus for the FCA will be ensuring platforms are positioned to squeeze the best possible deals out of fund managers on behalf of their users,’ said Mackay.

‘As part of this, the regulator should re-examine the ban on the payment of cash rebates from fund manager to platforms. Provided cash rebates are paid 100% for the benefit of customers, unwinding his ban would enable platforms to use their scale to negotiate discounts for their customers.’

Mackay argued that a reversal of the ban would ‘reinstate a more competitive dynamic between platforms and fund groups’ and would ultimately bring costs down for investors.

5 comments so far. Why not have your say?

Empty Glass

Jul 17, 2017 at 17:28

I hope the FCA looks at fees for switching platform. From comments on various forums switching fees are competition limiting.

In particular, whenever a platform increases charges then switching should be free, or maybe at a lower capped fee.

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Law Man

Jul 17, 2017 at 18:28

On the basis that I hold very few OEIC funds, I do not object to the annual platform charge that I pay: £200 exc funds held.

If I used funds, I would object strongly to paying 0.45% p.a. Over a few decades this destroys returns.

Empty Glass has a fair point: limit exit charges to encourage competition.

I object more to the charges imposed by the fund/ IT manager: 1.5 to 2 % (or more) every year is high. It seems competition has not worked, despite some IT managers charging under 1%.

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Jul 17, 2017 at 19:41

I applaud this investigation. After years of apparently being overawed by the fund management / money management / platform industry, the FCA now seem to have some teeth. * It is right to look at platforms.* They make very big bucks, but there are big questions that deserve investigation about their charges, independence and relationship with the funds they plug. I welcome this.

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Jul 17, 2017 at 20:12

Without platforms we would still be paying extortionate fees to stockbrokers or fund companies, eg. 5% commission on funds for direct purchasers.

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Jul 17, 2017 at 20:32

I agree. But look carefully under the bonnet, and you will see that a huge number of people are now paying very hefty fees on platforms.

A large (and growing) number of people now manage their investments and their pensions via platforms. Platform fees - and how exactly these platoons operate - are well ripe for investigation.

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