A major acquisition in the platform technology market raises questions about the regulator’s inaction on these providers
After a decade of commentators predicting a mass consolidation in the platform industry, it seems we’re finally seeing some movement – although not necessarily in the area that most would have expected.
Stories of exiting the market (Investec), selling up (ATS), purchasing for scale (Aegon/Cofunds) and quietly – or not – looking to be bought (#nonames) are becoming all too common. But what is perhaps more interesting is the same type of activity is happening with the technology suppliers who underpin many of the platforms in the UK.
Last week’s news of FNZ’s successful bid – subject to final agreement in October – for GBST was possibly surprising for many in the platform industry and has raised many questions about the future of the GBST’s Composer technology and those who use it.
The whole process started with the seemingly random bid for GBST by Bravura – details of which were a little sketchy – before the news quickly went cold. A few weeks later, we heard FNZ (tech provider to Aviva, Santander and soon Quilter) is interested, as is SS&C. The latter own DST – tech provider used by St James’s Place and, for not much longer, Quilter.
FNZ itself has cash to splash now it has some private equity involvement and has already snapped up the German firm eBase and JHC, including its Figaro software, before the GBST news broke. Figaro is used by multiple platforms including AJ Bell and, interestingly, Quilter, which is using FNZ technology for its new wealth platform. There’s a pattern here…
I’ve talked about the risks of market concentration from technology suppliers before, and even tried to suggest the FCA would give it a good old mention in its Platforms Market Study Final Report, but to no avail. I’ll shout louder next time. Perhaps this is fair enough – there’s not a great deal to directly link the ability of a platform technology supplier to deliver and perform to customer outcomes. This responsibility sits firmly with the platform service provider, and ultimately the adviser who has chosen to use them.
Approaching the situation with a platform business model/engineering hat on – as we at Altus like to do – I always thought the most likely owner of GBST was going to be someone not currently a direct competitor.
GBST is a ‘just does the technology’ firm, a commercial off the shelf – or Cots – provider. It is not interested in helping the platform brand process applications, service clients or work things out when that critical market trade doesn’t go smoothly. Its speciality is providing the kit that allows a platform to do what it needs to do and remain regulatorily compliant. Building a solution along these lines can be pretty pricey.
Bravura operates in exactly the same space, hence they are in direct competition. Notwithstanding the fact the offer price may not have been acceptable to GBST, bringing these two technology companies together would cause a massive market concentration, with the regulator likely intervening in some way. (Prediction alert!)
FNZ and SS&C – or DST – operate in a slightly different part of the market, with both providing outsource services as well as the underlying technology that powers the platform. They are chosen by platforms which don’t wish to deal with the day-to-day running of their operation and want a solution that is relatively quick to market, but still want their name above the door. FNZ traditionally provides only a partial (investment administration) outsource, whereas SS&C will do almost everything for you. Everything except being responsible in the regulator’s eyes.
It’s this difference, and lack of direct competition, that will be important to the GBST shareholders, and indeed the regulator – albeit for differing reasons. SS&C would probably ensure the Composer name lives on and could run this alongside its Bluedoor software which in use at SJP.
For FNZ, the purchase is definitely about expansion and increasing that all-important assets under administration figure. Between them, FNZ and GBST hold over £250bn in the UK, over half of the investable assets on platforms in the UK. The recent announcement FNZ has bought JHC is further proof of this expansion drive and should mean FNZ is able to offer a pure software – Cots – solution to the market, where it doesn’t currently.
Of course, there’s another option for platform service providers: look to the smaller players in the market for best of breed options to form a core (e.g. Seccl, Finocomp and others) and perhaps build a few of the key capabilities, such as the user experience, yourself. This, of course, relies on said technology being able to easily integrate and exchange data in an automated fashion – and we’re not yet there in a lot of cases.
Regardless of whether FNZ is successful in its purchase of GBST, the trend for consolidation will make the importance of detailed due diligence when selecting your technology partners all the more important. ‘Too big to fail’ could easily apply to the likes of FNZ and other technology firms in the investment platform space in the future. Then maybe the regulator will take notice (and perhaps take action) and I can say then with confidence that my crystal ball has been fixed.
Ben Hammond is principal consultant at Altus
You can follow him on Twitter @BenHAltus