Five lessons for advisers from the FCA's platform study

NextWealth managing director Heather Hopkins picks out five lessons for advisers from the FCA's platform market study

Yesterday the Financial Conduct Authority (FCA) published the final report of its market study into investment platforms.

After nearly two years of reviewing competition in the platform market the final report, which you can read here, has set out what the FCA thinks about what platforms are doing well, and what they are not doing so well. Importantly this report clearly draws a distinction between D2C platforms and adviser platforms.

We think there are five main points for advisers.

Yesterday the Financial Conduct Authority (FCA) published the final report of its market study into investment platforms.

After nearly two years of reviewing competition in the platform market the final report, which you can read here, has set out what the FCA thinks about what platforms are doing well, and what they are not doing so well. Importantly this report clearly draws a distinction between D2C platforms and adviser platforms.

We think there are five main points for advisers.

1. Switching will get easier – but it will take time

The FCA has rightly recognised that the complexity and work required to switch platforms is one of the biggest barriers to competition among platforms. This is true of advised and D2C platforms. 

The cost, complexity and work associated with switching platforms is one of the reasons platform assets are so sticky. No matter what the platforms throw at advisers, the cost and headache to change platforms is just too big.

The FCA want to fix this and has introduced another consultation paper with some proposed remedies. While we would all like the regulator to get on with implementing the remedies the fact it is seeking input and that is a good thing.

There are two points to note in the proposed rules that I think are important for advisers.

  • One proposal is that platforms should offer consumers the option to be automatically put into the cheaper share class. At the moment, most platforms cannot do automatic share class transfers. At NextWealth we recently did some work on this and found that only one of the ten adviser platforms could do this automatically and a further three could do this manually. However, once the ‘how’ is sorted, this will be good news for advisers and consumers. The onus will sit with the platform to identify the cheapest share class and automatically transfer investors across.
  • The FCA also proposes that for platform transfers, the ceding platform convert the units to a fund so the receiving platform can accept an in specie transfer. This will reduce out of market risk and tax implications of switching platforms. Again, good news.

2. Switching does not need to so difficult (or expensive)

Carrying on the theme of platform switching, we were encouraged to see that the regulator does not expect an exhaustive suitability assessment for a platform switch. The assessment of suitability 'need only cover the main changes in the services proposed where this is part of an on-going advice service.' The regulator adds that iy expects this to be straightforward for less complex cases.

The FCA also cautions advisers that they need to 'be able to demonstrate that their charges are fair'. The regulator’s view seems to be that platform transfer work should be paid for out of on-going advice charges. It reminds advisers that any fees need to be justified. 

This will not be a problem for advisers charging fixed fees. But most still charge based on assets. If the regulator wants to encourage switching to boost competition, advisers need to be allowed to charge for the extra work.

3. Training and tools (probably) aren’t inducements

The terms of reference and interim report of the Investment Platform Market study seemed to suggest that adviser loyalty could be bought with a white labelled website or some training on how to use the platform.

It was fair for the regulator to ask the question whether these services should be paid for by the consumer or the adviser but we think they’ve come to the right conclusion. The final report recognises that many of these tools and services enhance the quality of the service to the client and do not 'impair compliance with the firm’s duty to act honestly'. 

This should be good news for advisers who use tools such as bul rebalacing to help their clients, as well as make their own lives easier.

4. The platform is not your nanny

There had been suggestions in the terms of reference and interim report that platforms ought to be monitoring behaviour of financial advisers. This final report acknowledges this is not the platform’s job. Importantly, advisers are responsible for notifying the platform of any orphan clients.

Clients that are not receiving an on-going advice service should not be paying for that service and it is your job to make sure you tell the platform.

5. Free ride for vertical integration

The report recognises that 'vertical integration may create a material risk of conflict of interest' but only reminded vertically integrated firms of their obligations to manage those conflicts. Further, while some respondents to the interim report suggested vertical integration might be creating barriers to entry and expansion, the FCA 'heard no further concrete evidence of harm'.

So, vertical integration, provided the conflicts are managed, is A-Okay in the eyes of the regulator. We are updating our research at the moment on financial advisers running their own fund and the trend seems to continue. The Platform Market Study certainly will not discourage mid to large size advice firms looking to run their own funds.

Heather Hopkins is managing director at NextWealth.

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