The Financial Conduct Authority (FCA) will look at how model portfolios are being constructed by platforms, and if they are providing ‘value for money’.
The FCA previously highlighted concerns about model portfolios in its asset management market study published in June.
A study of the platform market will consider similar concerns about the suitability of portfolios and the role of risk-rating technology and services.
The regulator said it has found that platforms are increasingly developing model portfolios which are becoming more and more popular for advised and non-advised clients.
As part of its review of the market the FCA will ask if these investment solutions are providing ‘value for money’, if they are appropriate for clients and if platforms’ risk profiling tools are correctly matching clients to model portfolios.
‘First, we will assess whether investors are being guided to products that are too complex for their knowledge and experience,’ the FCA paper said. ‘Where the complex product is determined not to be appropriate for the client the firm must warn the client against investing in complex products when the client does not have the necessary knowledge.’
Secondly the regulator said it will look at the risk profiling tools and see if these are correctly matching clients to portfolios, and what the asset allocations are in these portfolios.
Finally the regulator said it will look at the performance of these model portfolios and how these match up to the way the solutions are presented and explained to clients. When considering performance the FCA will ask whether providers are using poor performing in-house funds in their model portfolios.
‘If net performance is poor, this may be because the platform has not negotiated upstream charges or put more expensive in-house funds in the portfolio. Doing so will help us to determine whether consumers receive markedly different outcomes depending on their choice of platforms and whether performance or cost drives these differences,’ the paper said.
Read the full terms of reference for the FCA's platform study here.