A consequence of principle-based regulation is that interpretations of principles can vary enormously and this carries the risk of market failure. This is why the original platform paper highlighted, among others, two potential causes of market or regulatory failure.
First, that the introduction of new incentives may exacerbate the possibility that moving assets between platforms may not be in the interests of customers and, second, that at the time of placing assets on a platform consumers are not made aware of the terms and procedures applying if they move assets away from a platform.
Due to the uncertainty that surrounds these issues, the FSA’s feedback on the platform paper has provided further clarity.
The issue of platform ownership and disclosure of equity holdings is a good example of the new incentives that the FSA was referring to. There are many different business models that work in financial services and it is not always a question of one being right or wrong.
However, if the nature of a business model creates a conflict of interest, the FSA has now made it clear that this should not only be disclosed but also that it should be managed. Although opinions may vary, this could mean that if there is an equity interest in a platform, advisers will have to show that any advice is not detrimental to the interests of customers and keep records to that effect.
In the context of re-registration, the FSA recognised the attempts to find an automated industrywide solution. Its feedback signalled that it is prepared to wait for this to be achieved but it also made it clear that the terms applying to platform exits should be clearly disclosed.
In this context, it is important that any restrictions are clearly stated in key features and terms and that the position for each platform is considered as part of the ongoing due diligence process that existing and potential users of platforms are now required to conduct.
This patience may be explained by the likelihood that the risk of customer detriment is marginalised by the expectation that the issue will be resolved either by the industry or by FSA intervention within a reasonable period of time.
Although these issues are significant for a small segment of advisers, it is perhaps the area of due diligence that the adviser community in general should focus on.
The FSA’s platform factsheet made it clear that advisers need to weigh up a range of factors when they consider the suitability of platforms. It is easy to compare bells and whistles and terms but the more challenging areas for advisers are to weigh up are aspects such as the integrity of underlying technology and sustainability.
As the market is rapidly evolving, with new platforms coming and going, we believe advisers need to build relationships with platforms that have a long-term future.
Although it will leave some emerging platforms with difficult questions to answer, it must surely mean that the initial screening criteria Peter Jordan, head of platform marketing Skandiawould lead advisers to focus on profitable platforms that are capable of developing sufficient scale and have the benefit of proprietary technology backed by a mature and proven IT organisation.
Whatever your view, the one thing that is sure is that the due diligence requires objectivity.
Decisions concerning platform suitability will need to stand up to FSA scrutiny, especially if adoption of a new platform involves movement of existing assets. This regulatory focus on the movement of assets between platforms and evidence of the benefits for the consumer will continue. The likelihood of a persistency review within five years, including those offering equity holdings, must be high.