Hargreaves Lansdown’s sector leading premium is likely to be overshadowed until at ‘least 2019’ as the Financial Conduct Authority probes sector businesses, RBC analyst Peter Lenardos has warned.
The FCA published the scope of its review today, saying it would examine sector competition and whether the biggest distributors use their pricing power on behalf of end consumers.
Taking the example of the regulator’s recent asset management study, which some consumer champions claimed had pulled its punches, Lenardos said it was not clear that the study would have much impact on Hargreaves’ business model.
‘But from a sentiment point of view, we believe this regulatory overhang is unhelpful to a share price that consistently trades at a sector leading multiple.
‘The financial impact to Hargreaves Lansdown – while unquantifiable – could be minimal and at most moderate in our opinion (based upon the asset manager precedent, we do not anticipate a material financial impact on the business, and acknowledge that the resulting impact could indeed be quite immaterial).’
The house left its outlook unchanged on a negative rating and a £14 price target, versus this morning’s share price of £12.82, up 0.23% on the day.
Hargreaves’ business model has been a perennial source of fascination in recent years as it consolidated a broad swathe of the market for Sipp and ISA investment brokerage.
While the company’s pre-tax profit margin has slid from a high of above 73% in 2009 it continues to retain 56.4% of revenue, versus an industry median of 26.7%.
In a statement, the company noted the FCA study’s ‘broad scope’ which will encompass effectively any business which offers an online investment service.
Hargeaves head of policy Tom McPhail (pictured) pointed out that the buying power of the biggest third-party intermediaries offered valuable wholesale pricing power, however.
‘This study recognises the vital service platforms now provide to millions of people, helping them to save and invest for their future,’ he said.
‘Platforms can also bring pressure to bear on asset management costs, negotiating discounts for investors, promoting good funds and highlighting poor performers.
‘As with the asset management study, this paper is not simply about the price charged by retail investment service providers, it is about the value they deliver to investors.’