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Reading matter

You can tell there is a public holiday approaching. By the time you read this, the FSA should have published a further instalment of the retail distribution review saga, expected to include final rules and long-awaited pronouncements on platforms. A clearing of desks, while creating the rest of the industry’s vacation reading, has become a hallmark of the review process at the FSA.

Publishing deadlines mean that, at the time of writing, I have not had the chance to see these latest pearls of wisdom. However, it may be that some significant clues can be found in the Financial Risk Outlook 2010, published by the regulator in March. Another couple of documents to add to your Easter pile.

It seems to me that our friends in Canary Wharf still have a good deal of scepticism when it comes to the way that matters are conducted in the platform market – and I know I am not alone in such views. A platform expert at one major IFA asked me a day or so after the document emerged if I thought this was the FSA throwing the gauntlet down to the wrap and platform sector. I find it hard not to come to that conclusion.

Given the FSA has published a retail intermediaries sector digest, one could be seduced into thinking it has made mat-ters easier by creating a subset of the main document. Sadly, this is not the case and it is actually necessary to read both the main document, at 88 pages, as well as the 13-page vignette, as each contain essential information but, alas, not the same information.

To deal with the minor document first, in the context of the platform market, most of this is relatively benign, stressing – although not for the first time – the need for firms to clearly understand restrictions to fund and product coverage, especially if a firm states it is independent.

The big red flag in the sector digest is a requirement for IFAs to have “suitable oversight arrangements” when making the transition from a transaction-led business model to a service-based one.

To some extent this is obvious, although it would have been helpful if the FSA could have been clearer about what it is actually looking for and examples of particular concerns it may have would have been helpful. Perhaps we will see a new small firms factsheet among the next set of documents.

Turning to the Financial Risk Outlook 2010 document, pages 57-70 should be essential reading for anyone involved with the financial advice community.

The regulator again stresses the risk that although platforms may offer customers better service, this may bring with it additional costs. The document then flags up the fact that advisers must not ignore assets not held on the platform.

I think these two factors are inexorably linked. My own organisation is currently building a significant body of evidence that suggests if you factor in the high frictional cost of servicing legacy client assets and compare these with the reduced cost of both product and advice in a platform market, there will be an increasingly strong case after the RDR for moving vast numbers of clients’ investments, especially from closed books.

A platform expert asked me if the FSA is throwing the gauntlet down to the wrap and platform sector. I find it hard not to come to the same conclusion

The regulator again makes the point that the lack of re-registration capabilities can make it difficult for clients to move assets and force them to incur unnecessary costs. This issue now makes it into the Key Messages for Firms part of the document.

This looks to me like the regulator, quite reasonably, serving notice on the platform community that it must deliver on all the promises of re-registration. There seems to be a change in the language used. In the past, the FSA has placed an obligation on advisers to make consumers aware of any constraints that might inhibit the transfer of clients’ assets but they are now saying this should be a factor included when deciding on which platform to use.

To me, this appears tantamount to the FSA saying, do not use platforms that fail to offer re-registration.

Combine this with the existing obligation for IFAs to periodically review the ongoing suitability of any platform and the case for some of the largest players in the industry looks shaky. Certainly, against the background of the FSA statement in such an important document, I would not want to be the individual having to justify the selection of a platform without such facilities during an Arrow visit.

In my experience, many advisers will welcome pressure from the regulator to address this issue. Change is long overdue and quite frankly the lock-in effect that the lack of re-registration has effectively created undermines the positive arguments the guilty platforms make about wanting to offer consumers better ways to grow their money.

Time and again, we have heard platforms saying they are making progress on this point but, conveniently for those locking in billions of pounds-worth of assets, nothing has yet materialised.

I hope the next wave of RDR documentation, including the long awaited view on platforms, will further reinforce this position, ideally setting a firm timetable by which time such arrangements should be in place. If not, perhaps this should be a primary message for firms to include in any feedback to the next round of consultation.

The platform industry has perhaps more to gain from the RDR than any other sector but until it removes protectionist restrictions on re-registration, it undermines its own case. If the regulator is about to turn up the heat, that will be a good thing.

Ian McKenna is director of the Finance & Technology Research Centre


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