Ian McKenna: FCA due diligence review raises serious questions for platforms and advisers


My initial reaction on opening TR16/1 last month was: where is the rest of it? I cannot remember seeing a shorter thematic review from the FCA. But while the document is concise (perhaps mirroring the regulator’s suggestions advisers should keep suitability reports short) it raises significant questions for both advisers and platform operators.

The paper starts well for advisers, recognising “firms sought to achieve positive outcomes for clients” with their due diligence and research. However, it quickly identifies areas where more can be done. For example, the regulator feels some advisers are getting too comfortable with their existing platform arrangements.

Concerns are also raised over some allowing their processes to be too influenced by what can be supported by the platforms currently in use. In addition, a failure of some firms to identify the difference between good service for the adviser and good service for the client is highlighted. Is this the first indication the FCA is looking at the overall question of who benefits most from platforms?

For the traditional platform operators, I see a range of major challenges. Is a retail platform now a service that provides more benefits to the adviser than the client? Will advisers’ own client portals replace the need for the client-facing technology platforms offer? Could technology suppliers provide wider services that could replace those a retail platform provides? If so, why are consumers paying ad valorem charges for what are essentially technology services?

The FCA’s encouragement for advisers to question the status quo will lead many to explore a wider range of options. Does it really make sense to move clients from one retail platform to another very similar one, or should firms look to be more creative? I find myself talking to more and more people interested in whether they can take much of the functionality they have previously sourced from retail platforms in-house.

Certainly, the entry level at which this could be seriously considered has fallen considerably. It used to be something that could really only be looked at by those that could put excess of £500m on a single platform. But this level seems to have fallen substantially. Indeed, a number of organisations are keen to give advice firms trading and execution capability.

In the post-RDR world the financial planning elements of advisers’ work are increasingly being recognised as where the most significant value lies for consumers. This work is time consuming and advisers deserve to be properly remunerated for it. If consumers are paying more than they need to for platform services this effectively caps the level of charges advisers can make for themselves.

In encouraging firms to revisit their thoughts on the best way to provide services for clients, TR16/1 should not only enable better consumer outcomes but also help advisers recognise where they can reduce overall costs to their clients.

Meanwhile, the thematic review highlights a second paper on implementing Mifid II is due later this year, which will include requirements relating to research on products and services. Stating the FCA will “set out expectations in this area and help them raise the standards and adopt good practices” it seems we are yet to see the final regulatory requirements on due diligence and research. But aligning FCA research requirements with those from Mifid implementation makes good sense, and it is refreshing to see the regulator recognise this. In the meantime, it has already provided larger advice firms with a lot to think about.

Ian McKenna is director of the Finance & Technology Research Centre