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Build a lifeboat

It is not hard to form the conclusion that the FSA is increasingly concerned about the financial strength of elements of the wrap and platform market.

Many of the players are parts of institutional financial services businesses with resources measured in billions but at the other end of the scale, others are significantly smaller. So far, all the players that have left this market have, in fact, come from the former category and have been well positioned to conduct an orderly exit but what will happen if a small platform or wrap gets into trouble?

When one links together various statements by FSA senior associate Steve Tully, reported from a number of different conferences, a pattern seems to be emerging.

At last month’s Tisa conference, Tully apparently warned that providers need to put aside enough cash to cover the cost of a wind-down. More recently, at the Platform Evolution conference, he observed it is no secret that not all platforms make money and went on to recognise that “no firm logically is in business not to make money”.

Combine these situations with the lack of progress made in the area of re-registration – another subject on which Tully has spoken recently – and it seems to me there is a case for advisers who have placed clients with some of these smaller platform players to consider reviewing their ongoing suitability.

There is an increasing debate about the importance of due diligence in platform selection. This is not a new issue. As long ago as June 2007, the FSA made it clear that it expected advisers to carry out periodic reviews of the ongoing suitability of a wrap or platform for a client. This was reinforced in its September factsheet last year which also stressed the importance of avoiding conflicts of interests.

Against this background, adviser firms with shareholdings in the platforms they recommend might want to be particularly cautious.

I see this not just as an important issue for advisers but also for the whole platform market, including providers, large and small.

Right now, while we can all see its potential, the platform market in the UK is still in an embryonic stage. For example, there is a noticeable lack of coverage on wraps in the national personal finance press. The most recent article in a national newspaper identified in a quick Google search on the subject dated back to 2006.

Choosing the best wrap account, although an obvious subject for the national press, does not appear to feature highly among many personal finance editors’ priorities.

If, however, a wrap or platform were to cease trading, leaving investors with, at best, a cumbersome process to extricate their assets, this would, I am sure, be considered highly newsworthy.

It could be disastrous if the first time the national press really engage on the subject were the demise of a player causing consumer detriment. There would be a strong possibility that, like politicians, the good and the bad would all be tarred with the same brush.

If there is a risk that one or more wrap providers may no longer be able to trade in the long term, then there is a clear and current need for the provider community to put in place a lifeboat service that could step in and take day to day operational control of any platform in difficulty to help with an orderly closure.

In providing such a service, the lifeboat could also protect any long-term value accrued in a failing platform to maximise the amount available to any potential creditors.

The cost of such activity could be spread across the remaining players in the market who would benefit by avoiding damaging, adverse publicity and maintaining adviser and consumer confidence at what is a crucial stage of this market’s evolution.

It is in no one’s interests to see a platform fail but I equally think it is in no one’s interests to collectively put our heads in the sand.

At some point, it must be likely that a platform will fail, especially where some of those businesses have been new start-ups. Many new busin- esses fail, why should the wrap and platform industry feel it is immune from such risks?

Spread across the half a dozen or so major platforms that exist, the cost of creating such a lifeboat could be kept modest, certainly far less than the cost of emergency PR and a long term campaign to re-establish consumer confidence if there were to be a failure.

Twenty years ago, it was standard practice that if one life company got into trouble, another would discreetly step in absorb the business and similar tactics have been used recently when a number of building societies have faced liquidity challenges.

Against the background of the Equitable Life debacle and more recently the cost of Lloyds stepping in to buy HBOS, it is probably unlikely that a single provider might risk diluting their own shareholder value to stage such a rescue.

If, however, the leading players were to act collectively to protect consumer interests, they might protect them- selves against a loss of confidence in the market at such a crucial stage of its development.

Several people have said the platform market spends too much time airing its disagreements in public and I support this view. The same amount of energy expended on creating a lifeboat to increase market confidence would be a far better use of time and money.

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