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The key questions in FCA's platform market study

The key aims of the FCA's platform market study.

Today the Financial Conduct Authority (FCA) rolled out the terms of reference for the investment platforms market study. It has asked for feedback on a large number of areas related to investment platforms so New Model Adviser® has picked up some of the key questions for your consideration.

Christopher Woolard, executive director of strategy and competition at the FCA, said the main goal is to find out if platform competition is working for consumers.

‘With the increasing use of platforms, and the issues raised by our previous work, we want 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.

Today the Financial Conduct Authority (FCA) rolled out the terms of reference for the investment platforms market study. It has asked for feedback on a large number of areas related to investment platforms so New Model Adviser® has picked up some of the key questions for your consideration.

Christopher Woolard, executive director of strategy and competition at the FCA, said the main goal is to find out if platform competition is working for consumers.

‘With the increasing use of platforms, and the issues raised by our previous work, we want 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.

How are adviser charges impacted by the choice of platform?

 

The regulator stated this is not a study that will cover advice suitability or advice value. However, much of what it has proposed to look at does directly impact on these areas. For example, the FCA said it wants to see how the choice of platform impacts on how much the adviser charges the client.

‘We want to assess the impact advisers have on platform costs and quality, understand whether the benefits advisers secure from their platform are passed on to investors and how use of a platform has affected advisers charges.’

What impact do third-party tech providers have on the platform market?

 

Platform technology has continued to hold the attention of advisers who are keen to know how their platform options really stack up.

The FCA will ask whether the growing trend for platforms to outsource their technology affects charges and innovation. 

'We will explore whether technology providers create barriers to entry and prevent platforms from being able to compete to innovate and offer value for money to consumers,' it said. 

The questions are does the apparently ‘concentrated' platform technology market mean new entrants face high costs to finding technology, and does the limited choice mean they struggle to offer anything new?

Are model platforms’ portfolios offered by advisers value for money?

 

The word ‘value’ crops up 48 times in the 29 pages of text in the document. Some of those appearances are at the point the FCA asks if model portfolios are value for money for clients.

As part of its platform market review the FCA will also ask if these investment solutions 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.’

Are larger platforms passing on the benefits of economy of scale?

 

The regulator wants to know first of all what kind of economies of scale exist for platforms - is it really cheaper for them to run their business the more tens of billions of pounds in assets under administration they have?

Second, assuming such economies are there, the regulator wants to know if those benefits are trickling down to the client in terms of savings.

‘Platforms are likely to incur significant IT and infrastructure costs which may mean they have to reach a certain scale in order to compete effectively. We will assess whether such economies of scale exist, whether they protect existing platforms from competition and whether they get passed on to consumers in the form of lower prices.’

What are the barriers to platforms developing advice propositions?

 

The terms of reference quite simply state:

'We want to understand whether there are barriers preventing platforms developing advice propositions,’

When asked why the FCA was concerned with this Mary Starks, director of competition and chief economist at the FCA said she wanted to clarify the grey area between guidance and advice for platforms. For anyone familiar with the financial advice market review (FAMR) this will sound familiar.

‘There is a well-known set of issues around the borderline between advice and execution only that was raised in FAMR - the issues that automated businesses have in developing propositions that are as helpful as they can possibly be to their clients without tipping over into regulated advice,' she said.

Do commercial relationships drive investment choices on platforms?

 

A side effect of vertical integration is the blurring of providers’ competition for business with platforms.

Or, as the FCA put it:

‘The platforms market is becoming increasingly vertically integrated, with commercial relationships existing between platforms, asset managers, discretionary investment managers and financial advisers.

‘The way in which platforms negotiate with product providers may affect the outcomes consumers receive from their investment products.’

The aim of the regulator is to establish ‘how platforms’ interaction with other parts of the value chain ‘affect platforms’ incentives, the products they promote, the choices investors make and ultimately the value for money they receive.’

Is there a conflict of interest in third-party ratings providers’ work with platforms?

 

Third party ratings providers received a warning shot in the interim asset management market study mentioned the FCA was keen to see

 ‘Respondents to the asset management market study suggested that some fund rating providers do not offer a whole of market review and expressed concern regarding the conflict of interest where an asset manager agrees to pay the rating firm for a licence to use their ratings.

‘We have also heard from asset managers who do not pay for a licence fee that this means that their funds will not be rated. We want to understand what impact third party research providers’ business models have on platforms’ ability to construct tools which help consumers and financial advisers choose investment products that meet investors’ needs.’

Do barriers to switching platforms lead to struggles for challenger platforms?

 

Another concern about competition in the market stems from the barriers that could stop clients switching between platforms, and in particular, switching to a smaller, newer platform.

‘Do challenger platforms and similar firms struggle to compete as customers face barriers to switching?’ the FCA document asks.

It goes on to explain it will looks at the barriers to switching and their effects on consumer choice-making.

A notable barrier are the discordant systems for transfers and re-registrations. The FCA said it welcomed the actions of pensions, insurance and investment trade bodies calling for providers to work together and improve the situation.

How the platform market is broken up

 

The FCA wants to understand the size of advised and non-advised platforms, and how these models work in relation to each other and the wider investment market.

This flowchart gives some indication of the size of the study, and why the regulator is looking at non-platforms such as wealth managers as well.

All figures in the chart are from a Platforum study of the platform market.

Key questions

 

A handy graphic from the regulator shows the key questions they hope to answer in the platform market study.
If you can help them with this, please send answers on a postcard, or your terms of reference feedback, to the FCA by the 8 September.

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