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A platform for change

The FSA has warned that it has concerns about potential for conflicts of interest, extra consumer costs and inappropriate investment advice when using wrap platforms.

In the feedback statement to last summer’s platform discussion paper, published last week, the FSA pledged to visit a number of adviser firms of all sizes to ensure they are using platforms appropriately.

The FSA says advisers may not be treating customers fairly if they fail to manage potential conflicts of interest, such as if the adviser has shares in the platform.

It warns that advisers may not always have the appro-priate competence to provide the level of investment advice they can offer through a platform.

It suggests that consumers may face increased complex-ity and costs without receiving new or valued services from the platform.

Providers leapt to welcome the FSA’s announcement. Nucleus chief executive David Ferguson says he “couldn’t be more upbeat” about the FSA’s message.

FundsNetwork head David Dalton-Brown says he thinks the FSA is “absolutely right” to look at transparency and charges to the consumer.

Ascentric business development director Mike Fordham says: “We completely welcome the response. It just identifies how ideally placed we are.”

But do providers really welcome this intervention?

Max Horne Financial Services partner Max Horne questions whether providers always have the right attitude when drawing up platform charges.

He says: “It is may be a bit cynical to say you are throwing open the doors to the FSA and have nothing to hide but still charge more than what is competitive.”

KohnCougar managing director Roddy Kohn believes the FSA’s intervention is a natural response to the heavy lobbying exerted on it by insurance companies and investment managers.

He says: “Many organisa-tions are disenfranchised by the existence of wraps and are concerned the threats do not go unchecked. They see wraps as diluting their share of consumers and links with the IFA sector.”

By revisiting the issue of conflict of interest, the FSA risks stoking an already brooding argument between life companies and smaller platform providers.

FSA director of retail policy and themes lead Rory Percival says firms must be aware of issues with remuneration and share ownership so as to manage any potential conflict of interest effectively.

He says: “One of key drivers to the value of your firm is the level and quality of renewal income. If you have more assets on a platform, you increase the value of your firm. We want firms to manage that potential conflict of interest as we would not want the benefit to the firm overriding its assessment of suitability for customers.”

WR Financial managing director Graham Laverick, one of the latest members to join the board of Nucleus, insists there is nothing wrong with advisers holding shares in a platform.

He says the model is right, as long as the firm sticks to the principle of transparent charging. He says: “A client can choose to deal with us or find another IFA, but as long as we are not ripping off the client, that is paramount.”

On this point, Fordham argues many of the life company-owned wrap platforms fail the test of transparency by bundling costs together and limiting investment choices to their own products.

He says: “They are not independent and if the company is tied that cannot be good for the consumer.”

Clancy’s Financial Planning financial planner Jim Clancy agrees that wrap platforms have to make their charges more transparent. However, he says the regulator must understand that, rather than add costs to the consumer, platforms actually prove an important factor in driving down charges.

He says prior to the advent of platform technology, executing simple client instructions could take weeks and involve cheques changing hands numerous times. Now this can all be handled by platforms.

He says: “They reduce cumbersome paperwork and allows clients access to their portfolio 24/7. There are also benefits to the adviser in transacting in an efficient manner clients’ instructions.”

Clancy is pleased the FSA is talking about a principles, rather than rule-based, approach to regulation and warns there is a distinct danger that over-regulation would restrict innovation in the nascent platform industry. He says: “Otherwise we may as well just have an FSA wrap platform.”

Kohn says the FSA should widen its net to look beyond advisers and platform providers to examine the industry at large.

He says many investors are not receiving impartial advice from the wealth management arms of banks using their own pseudowrap platform, in the form of a portfolio management service.

He says: “Their financial advisers will recommend their own portfolio management service or platform to their clients. It is almost perverse that the FSA doesn’t see this as the same conflict of interest.”

“Just because a bank or building society does not call it a wrap does not mean it is not one. If the FSA has concerns, they need to be expressed industry wide.”

Going forward, Clancy welcomes the visits to adviser firms but says he would urge the FSA to more actively seek the opinion of ordinary IFAs during the consultative process.

He says: “Because this is a new technology and a different business model I would urge them to set up a committee made up of ordinary IFAs, not large companies, to feed back the pros and cons. It is the only way you are going to have regulation that promotes good practice.”

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