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Clive Waller: Why the FCA focus on platforms?

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Back in 2003, we conducted a piece of work for JP Morgan FundsHub. The work was set out by the estimable David Moffat, then their marketing director.

Among one of David’s many prescient questions was: “Will platforms become the back office or will back office systems become the platform?”

Some 14 years later, that question is still relevant. The costly and lengthy re-registration process between platforms means advisers are leaving legacy business where it is. The only place to aggregate is the practice management system – what we used to call the back office system. Intelliflo, for example, is becoming a very powerful tool for the adviser, and, like Dynamic Planner, will help advisers wishing to digitise their business.

Aggregation is and always has been one of the planks underpinning platforms. This brings me to the FCA’s proposed platforms market study.

I have often argued the regulator does not understand platforms. As the late, great Paul Bradshaw said, “Platforms are merely expensive bits of technology.” He was, as ever, right.

The platform sector suffered two quirks from its early days. Firstly, because the supermarkets were, in essence, outsourced administration for asset managers, the typical annual fund management fee of 1.5 per cent was sliced up so that the platform portion of 25 basis points was paid for by the customer (albeit hidden).

FCA to investigate adviser platform choice

The more transparent wraps charged the customer openly. Thus, from day one, the customer was paying for a piece of software that should have been paid for by the adviser.

Secondly, the FSA treated the platform as a product, albeit, for a period, the expression changed to “platform service”. As the organiser of the Schroders UK Platform Awards, I have tried to define platforms countless times, and always failed.

But now the so-called platform is no longer a piece of software. It is a collection of systems. As an example, Nucleus runs on Bravura, but its administration is on Genpact’s platform – so that is three bits to start with. Best Practice chief executive Ian Cooke has built Fusion Wealth to support his (and other) adviser businesses, using his own firm, Creative Technology’s software, with SEI doing the heavy lifting at the back end. Which bit is the platform in that scenario?

Prior to the RDR, former Towry chief executive Andrew Fisher told a conference that he did not use a platform – he used an admin hub. He added he did not expect the regulator to tell him what admin system to use. Unusually, Towry paid for the SEI powered system, and billed clients according to costs they incurred. For me this is obviously the way to go.

The FCA continues to demonstrate a lack of understanding of the platform market. In its interim asset management report in November, the regulator questioned why platforms did not negotiate deals for bestselling funds. This issue has reappeared in the proposed platform paper.

There are three issues with this:

  • Asset managers do not need to give discounts on their bestselling funds, as if funds are bestselling there is no need to offer an additional incentive
  • By and large, adviser platforms cannot and do not negotiate with fund managers. Negotiation means a promise of flows. The likes of St James’s Place, Old Mutual Wealth and Hargreaves Lansdown are in a position to negotiate discounts. But advisers, by the regulator’s own rules, cannot promise flows in advance. That contravenes independence.
  • Discounts come in two forms, typically preferential share classes and segregated mandates. And while preferential share classes are hard to re-reg, segregated mandates are impossible to re-reg.

New technologies are going to change the face of retail investment beyond recognition. But the regulator is continuing to look through the rear view mirror.

There should be only one concern – good customer outcomes. We need to see total transparency of all charges (including transaction charges). Charges deplete customer returns.

There is quite enough competition in the platform market, arguably too much. The benefits to customers continue to grow, including immediate valuations at any time of day and the ability to perform their own cash flow modelling. Individuals will soon have their own data and will be informed buyers of financial planning services and products. The term platform will become meaningless.

What the regulator should be focusing on is ensuring consumers understand where every pound is taken out of their investments by the financial services industry. wherever that is in the value chain. Yet, what we have instead is more consultation, when the emphasis should be on making a real difference to investors.

Clive Waller is managing director of CWC Research

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. A little too much insight and common sense in one article I think.

  2. Great article demonstrating an in depth knowledge of the platform (aka wrap) space. Totally agree and still frustrated that the FCA treat platforms as products. After all, they don’t regulate the likes of Intelliflo or Iress (albeit that may be an over simplistic comparison). The whole idea was to get away from product providers controlling everything and empower advisers. Unfortunately the waters have been muddied by the fact that it is the providers who have either launched or are buying up the platforms. Hence, the FCA’s treatment of platforms as another product.

  3. So in short …

    A platform is the unicorn !

    No wonder the FCA is spending thousands trying to catch and domesticate it

    Very good article by the way !

  4. Richard Anderson 28th July 2017 at 9:48 am

    Good article. I would, however, take issue on one point. Many commentators have suggested that the platform is for the adviser’s benefit. I’m afraid I don’t agree. By far the greatest benefit is for the client, namely in being able to have their £200k (or whatever) split between 10 (or however many) different fund houses in one account. Crucially, another benefit is that, when selling a Jupiter fund (for example)we can quickly use the proceeds to buy an Invesco fund (for example). In the old world we would have had to instruct the sale with Jupiter, wait for the client to receive the cheque, bank it, clear it, and give us another cheque, and application form, for Invesco – very ‘Fred Flintstone’! Yes, the adviser benefits by being able to provide a swift and consolidated valuation for the client, but this is also a benefit to the client because they get it quicker too.

    My only gripe is that the regulator constantly bangs on about us carrying out due diligence on platforms (which we do). If they are not fit for purpose they should not be trading – isn’t that the regulator’s job??

    • By far one of the biggest benefits to investors is the fund charges applicable on platforms; something we all take for granted and largely forget when discussing the pros and cons of investing via a platform as opposed to direct.

  5. To answer the question posed by the title: To distract attention from its own multitude of failings, in preference to actually doing something about them.

  6. Great article and can be summed up by your paragraph……. “New technologies are going to change the face of retail investment beyond recognition. But the regulator is continuing to look through the rear view mirror”.
    To me, this sums our regulator up perfectly.

  7. Good response by Richard Anderson and also good question; what is the first line of defence against a failing business, is it regulation or ‘the market’ (aka due diligence by users)? IMHO regulation will always be behind the curve so can never be relied upon.
    However, back to Clive’s article where I have slightly more sympathy for the regulator than Clive has. They are stuck with a 30 year old definition of ‘independence’ which is restricted to just being about product choice. Therefore, to have ‘independent’ financial advisers you must have ‘products’ for them to be independent about. Hence defining everything in relation to products. Vertical integration, open architecture product fund choice and the growth of the ‘restricted’ sector (including Towry Law as mentioned) is making a mockery of all this so perhaps the real culprit is such an out-of-date definition. Time for a change?

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