As the UK's Financial Conduct Authority considers imposing more rules on the operators of investment platforms, it has brought out a market report to clarify its thinking. The good news is that it is not, at least at this stage, proposing to make them generate more information about costs and charges.
HNW investors and financial advisors use investment platforms to access suppliers in one place and to execute, review and change their investments. The platform service provider market has doubled since 2013 from £250 billion to £500 billion assets under administration (AuA). There are two main types of investment platform. Direct-to-consumer (D2C) platforms collectively administer £189 billion and consumers use them without the help of their financial advisors. Advisor platforms collectively administer £311 billion and are chosen by advisors but paid for by consumers. The D2C market is dominated by a single platform with 40% of market share. Four platforms dominate the advisor market, but none has as much as one-fifth.
The FCA's research has led it to believe that the market is working quite well at the moment, but it has the following five areas of concern.
- It can be difficult for customers to switch between platforms.
- Customers can find it hard to shop around.
- The risks and expected returns of model portfolios with similar risk labels are unclear, with the danger that consumers who use these model portfolios may have the wrong idea about the risks and returns they face.
- Consumers may be missing out by holding too much cash. If they hold large cash balances on D2C platforms they may not know that they are missing out on investment returns, the interest they lose or the charges they pay by holding cash in this way.
- So-called “orphan clients” who were previously advised but no longer have any relationship with their financial advisors might face higher charges and worse service.
In addition, platforms might not be encouraging asset managers to compete with each other as well as they ought to because they sometimes restrict the opportunities (and incentives) that fund managers may have to offer fund discounts to competitor platforms, which in turn may reduce competition on fund discounts. Platforms could also improve the ways in which they present fund charges at different stages of the consumer’s decision-making process.
The regulator is thinking about reducing switching costs by banning exit fees. On the subject of consumers on D2C platforms who find it difficult to shop around and choose platforms according to prices, the FCA notes that the European Union's second Markets in Financial Instruments Directive or MiFID II has introduced aggregated total charge disclosure, which should help improve comparability. The FCA is hoping to see more innovation in the way platforms present their MiFID II costs and charges data.
To improve results for orphan clients, it is thinking of tackling price discrimination between orphan and existing clients, requiring ever platform to have a process in place to persuade each of these customers to switch to a more appropriate proposition and/or requiring advisor platforms to check, if there is no activity after a year, that each of their customers is receiving an advice service, at the same time telling it about every orphan client who is still paying an advisor for advice that he no longer receives.
The FCA has already (in the consultative document CP18/9) proposed to make up a new rule to require the managers of open-ended funds to explain why they have used this-or-that specific benchmark, or alternatively explain how investors should assess fund performance. It has also proposed to set times at which it expects funds to tell it about benchmarks that they use for internal purposes.