Orphan clients, fund manager charges and technology suppliers’ capital requirements are all expected to be under the microscope
The industry is waiting with bated breath for the FCA’s Investment Platforms Market Study final report. Here are our top three predictions for what will emerge.
1. Rules for orphan client charging
The FCA is very clear that customer outcomes are almighty, and this is ultimately what it will be judging platforms on. Requirements for ex-ante and valuation reporting, 10 per cent drop notifications and a range of other outputs are now in force, with very strict rules for how and when customers receive these.
So, how should a platform handle a customer who no longer has regular contact with their adviser, once they have gone through the potentially painful process of interpreting the FCA’s “no advised transaction for 12 months” proposal?
If they are considered an orphan, or “dis-intermediated” as some prefer, the platform is obligated to provide a service to that customer. However, they may also want to charge an additional fee as there is no longer an adviser in play.
The orphaned customer should ultimately remain in control and expect to get the information they need to make an informed decision as to whether they are able to stick where they are or move on.
I think the FCA will have something to say here and require any platform or wealth management firm to think carefully before increasing their charge for orphan customers, with specific requirements for justifying this service.
It could also easily mandate that platforms carry out a periodic check that a customer is still receiving ongoing advice, although should bear in the mind the criticism this idea has previously received.
2. Sunset clause for fund managers
When it comes to old school/implicit/dirty (delete as you see fit) charging by fund managers, I think the FCA will put its foot down, perhaps even with an RDR3. After all, why should a customer pay 150 basis points from within their fund when they can pay 75bps plus what should be a much less than 75bps platform charge?
Some of the savvier names have already taken the plunge and launched their own platform service or have bought up firms with a ready-made solution to offer their legacy customers. A few are burying their heads in the sand and still others are considering simply slashing their charges to remain attractive to customers and persuade the regulator they are taking action. But it will not be that easy and fund managers should be ready to make a change.
Vanguard is a particular success story here. Launching in 2017, it already has more than £1bn on its new platform, despite a basic asset range and limited product offering. It is also pretty cost-effective, which would seem to meet the FCA’s value-for-money determinant right away.
Whatever happens, customers are more aware than ever how much they are being charged thanks to Mifid II, and fund managers need to start acting now.
3. Capital requirements for technology suppliers
Platforms are technology, simple as that. Admittedly, you will always need at least a small team of specialists to keep the lights on and meet regulatory requirements; however, people are less important in this industry than they used to be, and rightly so.
The FCA will have spoken to many key platform technology providers as part of its research and will want to put further controls in place.
FNZ is a case in point here. It provides the underlying technology and investment administration services for a number of big platform names, which raises the question of “too big to fail” and it becoming a single point of failure.
Others in this boat include Bravura, GBST and SEI, and a number of new kids on the block, with the FCA looking to them all to prove their resilience and not end up in the same boat as TSB.
I cannot see the FCA simply monitoring from the sidelines. Rather it will put in place a number of rules and checks, in addition to a senior managers regime-style monitoring system and additional permission types. This will help limit the chance of failure and millions of customers being unable to access their investments, even if for a short period of time. As with the banking or insurance industries, capital requirements could easily be replicated here, so ensuring any technology provider can continue to operate for a time if they do go into administration.
We will have to wait a while longer to find out what is really up the regulator’s sleeve when it comes to the final report, but one thing is certain: the most reliable way to predict the future is to create it, and only the FCA can do that.
Ben Hammond is principal consultant at Altus