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FCA warns advisers over platform inducements

technical financial graph on technology abstract backgroundThe FCA has warned financial planners that additional services offered by their platform may be in breach of its inducement rules.

While the regulator has said that competition between platforms is working well for most consumers in its market study this morning, it has warned that add-ons for advisers that are paid for by the client through platform charges may not actually benefit the end user, and could constitute an inducement to adviser business.

The study reads: “We found that some advisers use services including the provision of some adviser education and training courses, white labelling, and bulk rebalancing and model portfolio management tools, which are likely to benefit advisers but not necessarily their clients. Some of these services are likely to be so-called non-monetary benefits, so they likely to be caught by our inducement rules.

“Advisers need to demonstrate that these benefits are acceptable minor non-monetary benefits, for example because they can enhance the quality of the service to the client and will not impair the firm’s compliance with its duty to act in the client’s best interests.”

Mifid II, introduced in January, formalises tighter rules on what goods and services advisers can receive from product providers, confirming that these should be limited to “minor” non-monetary benefits only.

The FCA is also considering action to prevent consumers who were previously advised but no longer are, so called orphan clients, from being overcharged for services they no longer use.

The regulator estimates that between 400,000 orphan clients, this group still holds more than £10bn of assets on platform, and around 10,000 of these are paying additional charges adding £1.2m in costs a year.

It is considering a number of measures to address this, including “requiring platforms to have a process in place to get these customers to switch to a
more appropriate proposition” and “requiring adviser platforms to check, if there is no activity after a year, that their customers are receiving an advice service, and inform the FCA of orphan clients who are still paying an adviser for advice they no longer receive”.

The paper reads: “Orphan clients have limited ability to access and alter their investments on an adviser platform so are paying for functionality that they cannot use. While many platforms told us that they encourage orphan clients to find a new adviser or switch to a direct to consumer platform, some platforms also charge orphan clients extra fees, of up to 0.5 per cent on top of their pre-existing platform charges.”

The FCA is also going to conduct further work after finding that the risk and expected returns from model portfolios held on platform are unclear and vary considerably between the same risk rating.

Lang Cat consulting director Mike Barrett says: “The question of non-compliance with Mifid inducement rules for adviser benefits such as education, training and white-labelling could be very tricky to unbundle from the platform charge if required. The concerns raised for model portfolios and commercial relationships between platforms and asset managers are equally complex. Whilst the platforms themselves might be breathing a sigh of relief, advisers and asset managers are perhaps feeling that the spotlight has been turned onto them.”

FCA director of strategy and competition Christopher Woolard says: “[The platform] market that has seen significant growth in the past five years with more customers than ever deciding to use a platform to manage their money.  We know that competition is working well for many but it is important that the problems we have identified are addressed so that consumers don’t lose out.”

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Christopher Wicks 16th July 2018 at 8:15 am

    Its a crazy world the FCA lives in.

    So, bulk rebalancing and model portfolio services might put IFAs in breach of inducement rules because they benefit IFAs more than they benefit clients???

    Is it not in the interests of clients that they have well run and efficient IFAs advising them? These tools save time and enable IFAs to charge what they currently charge for their services. If they are removed and IFAs have to hire more staff to carry out the extra functions or pay for extra facilities – just who do the FCA think is ultimately going to pay for this???

    • Indeed, but this is what happens when you have people utterly divorced from reality, trying to justify their own existence.

      They come up with crackpot ideas that they and politicians think justifies their own existence.

      However until clients wake up to the fact that they pay for it all, nothing will change.

  2. Back to the bad old days then, cut out the platform charge and contact twenty companies to get a portfolio valuation, or spend weeks manually rebalancing portfolios.

    The FCA do not get it, advances in technology reduce costs and free up more time to give the client what they are really paying for, good advice.

    Clients do not want to be told that their fees are going up to cover increasing regulation and administration costs, supposedly all in the name of consumer protection.

  3. Nicholas Pleasure 16th July 2018 at 9:33 am

    Is this really the most pressing thing that the FCA could be spending its time on?

  4. Nicholas Pleasure 16th July 2018 at 9:35 am

    Non-advised client may have services on offer for which they are paying but not using, but as most advised platforms charge less than the direct to customer platforms I cannot really see an issue.

    Mr Client, you must move from Ascentric at 0.3% to HL at 0.4% because Ascentric offers functionality that you no longer use.

    Madness.

  5. Neil Liversidge 16th July 2018 at 1:53 pm

    The FCA needs to investigate, as a matter of extreme urgency, precisely how many angels can dance on the head of a pin.

  6. Julian Stevens 16th July 2018 at 4:48 pm

    Perhaps the FCA would be good enough to share with us the basis of its bonus system for staff and directors.

  7. Christopher Mayes 16th July 2018 at 6:02 pm

    The report highlights problems with switching platforms where they fail to deliver the service and imply that this is in part due to charges made by advisers.

    “The time it takes to switch between platforms was found to generally take a couple of weeks to a few months, but it can take longer.”

    Few of us accept that it is reasonable for a company to say that it takes five days to move money between bank accounts, why should it take any longer for funds on a platform?

    The blame lies with providers who exercise processes that are detrimental to the consumer, and who pass the cost of implementation onto advisers who are seeking to benefit their clients.

  8. Advisers should pay for the tools they use to do their jobs. Clients should pay for advice.

    Mind you, without platforms, how would advisers collect their fees?

  9. Clients are being ripped off something rotten by Vertical Integration yet our regulator would rather concentrate on £25 exit penalties and a few basis points on WRAP platforms. Something smells very fishy!

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