On 16 July 2018, the FCA published its interim report on its investment platforms market study. This follows the terms of reference issued in July 2017, which were produced as part of the next steps in the asset management market study final report (see our blog).
This blog summarises the FCA's findings and proposed remedies and explores the potential implications for firms. Overall, the FCA found that the market is working well in many respects so, as has been highlighted generally in the market's reaction, it is not proposing radical changes. Nevertheless it did identify some areas where competition is working less well and is proposing remedies which are primarily intended to facilitate shopping around through improved transparency and to reduce barriers to switching platforms. Key actions that the FCA intends to take before publishing its final report include a supervisory review of costs and charges disclosures and monitoring of progress against improving the ease of switching platforms. Perhaps most significantly, it will also consider a ban on platform exit fees as well as standard service agreements for switching.
The FCA's findings
The FCA found a 'mixed picture', but observed that 'customer satisfaction is currently high' and that the market is 'working well in many respects'. However, the FCA identified five areas where it believes competition between platforms is not working so well. These are:
- switching between platforms is difficult;
- shopping around for a lower cost platform is not easy;
- the risks and expected returns of model portfolios are unclear;
- consumers may be missing out by holding too much cash; and
- so-called 'orphan clients' (who were previously advised but no longer have an adviser) face higher charges with a lower service.
In addition, the FCA considers that the positive impact of platforms on competition between asset managers may be reduced because:
- platforms employ commercial practices which may restrict fund managers' incentives or ability to offer fund discounts to competitor platforms; and
- platforms could improve how they present fund charges at different stages of consumers' decision-making.
To address the concerns identified, the FCA has proposed potential remedies or further assessment work in the following areas:
- Making it easier for investors and
advisers to compare and switch platforms
- The FCA will work with the industry-led Transfers and Re-registration Industry Group (TRIG) on a minimum standard for transfers and re-registration times and clearer customer communications.
- FCA measures could include new requirements for platforms to provide a prompt and efficient switching service or to publish data on transfer times. If the FCA is not satisfied with the progress made by the industry it could take the more radical approach of setting minimum standards for transfer times.
- The FCA is seeking feedback on a potential ban on platform exit fees; on whether the fees charged by advisers when customers switch platforms are reasonable; and on whether to require a ceding platform to transfer consumers to the gaining platform's share class in cases where a share class has been created specifically for a particular platform.
- Helping consumers to shop
around through better price
- The FCA will conduct a supervisory review to assess whether platforms are meeting their costs and charges disclosure requirements under MIFID II. This will include assessing whether firms are using the MiFID II requirements as an opportunity to innovate with different ways of providing costs and charges information to consumers. The FCA may consider additional measures depending on the results of this review.
- The FCA will consider whether third party intermediaries could help consumers shop around by providing comparison services, for example if the FCA introduced measures to make it easier for them to access data on platform costs and performance and on customer usage.
- Helping consumers who find it hard to
compare the risk levels of model portfolios
- Following further assessment work, the FCA will consider applying current performance and risk disclosure obligations for funds onto model portfolios, and/or requiring firms to use standardised terminology to describe their strategy and asset allocation.
- Helping consumers who may be building
large cash balances without knowing about
interest, charges and potential lost investment returns
- The FCA is seeking further information on why consumers are holding large cash balances and will assess whether the existing rules go far enough to ensure consumers are making informed decisions.
- Making adviser platforms work better
for orphan clients who no longer have an
- The FCA will consider preventing adviser platforms from charging orphan clients more than advised clients, or measures to make orphan clients aware of the higher charges they are paying.
- The FCA is considering requiring platforms to have a process in place to encourage orphan clients to find a new adviser or switch to a direct-to-customer (D2C) platform.
- The FCA is considering requiring platforms to identify cases where a customer is paying an advice charge but there is no activity for a year to ensure the customer is still receiving advice.
- Strengthening the extent to which
platforms drive competition between asset
- As part of the FCA's review of how platforms are complying with the MiFID II costs and charges disclosure rules, the FCA will consider whether the disclosures related to the funds available on the platform are helping drive competition between asset managers. The FCA will then consider further measures if necessary.
- A small number of large platforms have arrangements with asset managers to secure the best or no worse fund prices than are given to other platforms. The FCA is seeking stakeholders' views on how these arrangements affect competition, including the potential to reduce incentives to make discounts available on other platforms.
- Addressing potential areas of
non-compliance with existing
- Tools and services offered by platforms to advisers should be assessed against adherence with the inducements rules.
- Investment platforms offering stock broking services should assess their best execution processes against current rules.
Implications for firms
The FCA is demonstrating an increasingly sharp emphasis on the transparency of costs and charges, both relating to platform charges and to fund charges displayed on platforms. Firms might therefore want to revisit their costs and charges disclosures ahead of the FCA's supervisory review. In particular, the FCA wants platforms to consider how they can display costs and charges in a way which is helpful to consumers, rather doing the minimum needed to comply with the rules. The FCA's occasional paper on costs and charges disclosures sets out some factors for firms to consider in this regard. Here firms might also consider industry good practice, such as providing interactive tools to help consumers calculate charges based on their platform usage.
Areas that platforms might revisit include:
- their processes for customers switching platforms and engaging with the TRIG to put in place an effective industry solution;
- how they would cover the costs associated with switching customers if exit fees were banned (an issue the FCA has asked for feedback on);
- compliance with the rules on inducements and best execution, as the FCA has indicated that it has identified potential non-compliance in these areas; and
- compliance with the rules relating to cash balances, including disclosing any charges and passing any interest earned onto the client unless the client has been notified in writing.
Separately, adviser platforms may wish to consider ways to encourage orphan clients to switch to D2C platforms; whilst adviser firms should review their processes specifically around how they charge consumers for advice relating to switching platforms.
The FCA is seeking feedback on its initial findings and proposed remedies by 21 September 2018, before publishing its final report in early 2019.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.