A decade ago, I went through the pain of switching utility providers. Deterred by a catalogue of errors, it is only recently, after a house move, that I tried again. I was pleasantly surprised by how easy it was.
It has made me think about how complex and expensive it is to switch in financial services, thanks to a combination of legacy providers, re-platforming service deterioration and the high-profile proposed sale of some insurers’ books to consolidators.
The FCA has a goal in its mission statement of increasing competition, but the complexity of the decision to move providers – and the advice around it – is the biggest barrier to an efficient market in this area.
Platforms should make switching easier. Surely platform X holding funds A, B and C should be directly and simply comparable to platform Y holding the same three funds?
The root of the issue is not the FCA but the layer upon layer of complexity subsequent governments have added with their tinkering, as well providers with their wish to “innovate”.
Using pensions as an example: there is no requirement to take advice for an individual to move from platform X to platform Y if there are no safeguarded benefits, but there is a requirement for me to give it, even if platform Y is half the cost of platform X and offers the same fund choice.
This is sensible to a degree, but an individual could have any combination of protected tax-free cash, capped drawdown or an early retirement date that could be prejudiced by a switch. These are generally uncommon but I certainly advise a lot of people who are better served by capped drawdown than flexi-access drawdown.
There are ways of protecting these benefits, but why does it need to be so complex? What significant benefit does the Treasury and the Government gain by only allowing one “free” transfer to protect tax-free cash? Why can’t any individual keep capped drawdown in any arrangement? These are significant barriers to competitiveness.
Legacy pensions are more complex still, with the possibility of waiver, life cover and guaranteed growth rates or other protections. Life assurance bonds will always be a special case, but even the humble Isa or general investment account requires a level of information and personal recommendation that restricts competitiveness.
The barriers to switching may well engender a feeling of complacency with platform providers. It is certainly hard for us to hold them to account when they know the cost of a bulk switch and, therefore, the fees we would need to charge to recommend and effect such a switch is disproportionate to any reasonable client benefit.
Even if we could reduce the cost via automation or some robo solution, there would be enough exceptions hit by the legislative complications detailed above to reduce the impact of such an action.
Conceptually, a platform was just a piece of software, but it is more complex than that. Even software can be hard to change: how many users swap from iPhone to Android or vice versa, or Microsoft to iOS?
We do need platforms, as clients need somewhere to hold their funds and someone to manufacture the tax efficient wrappers around them. But we need pressure from our regulator and professional bodies to loosen the major barriers to competitiveness: complex legislation and excessive regulation.
Alistair Cunningham is director of Wingate Financial Planning