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Supermarket sweep

William Watling says advisers need to ensure continuing due diligence when using fund supermarkets and platforms

Platforms and fund supermarkets have become a key part of the infrastructure for many IFAs over the past few years, and aim to provide an efficient means of managing and administering the investments of the adviser’s business.

However, as platforms have developed and their influence has widened, there is increasing concern as to whether their use is as transparent as it should be and whether it is right to adopt the one-solution-fits-all approach advocated by some in the industry. The potential regulatory, due diligence and even professional indemnity issues that surround the use of platforms by advisers are so complex and abundant that they deserve some rapid and intelligent investigation and solutions.

The FSA recently set out its thinking for the use and regulation of platforms in Discussion Paper 10/2. As a result, advisers that have chosen to use one or more platforms may now have to revisit whether or not due diligence was correctly carried out.

Against the background of the FSA’s thematic review and this much awaited discussion paper issued at the end of March, the UK platform market has been growing, both in terms of new platforms coming to market and the functionality they provide.

To understand more about how advisers are reacting to the challenges of the growing platform marketplace, Capita commissioned independent research in partnership with The Platforum. Throughout June and July this year, almost 200 adviser firms took part, with some interesting results.

Alarmingly, the research showed that less than half of the adviser population claims to be confidently prepared for adviser-charging through platform operators after 2012, with 11 per cent saying they were not at all prepared.

As platforms have developed, there is increasing concern as to whether their use is as transparent as it should be

On the contentious issue of whether an adviser should be able to call themselves independent if they only use one platform, the results could not have been more clearly split – 44 per cent agree that advisers should be able to call themselves independent, 0 per cent disagree and the remainder do not know. Worryingly, only 20 per cent of advisers say they are very confident they would be able to provide evidence of initial and ongoing due diligence for PI purposes and 10 per cent say they are not confident at all.

It is clear that the legal and, in particular, due diligence aspects of using platforms are still a source of some anxiety for a significant number of adviser firms – but this is not the only major issue that must be addressed.

Adviser firms already pay expensive premiums for PI cover and there is a growing school of thought that this protection could be at risk if they do not adopt proper processes for their clients’ platform selection and ongoing management.

The Finance Act 2010 originally included a provision for US-style class actions to be brought against banks, providers and other financial services firms, including advisers. Although this was withdrawn at the last minute to obtain support for approval before the election recess, it remains an objective in certain quarters as a means of holding the industry to account. The act does still contain a caveat that will allow the FSA to draw up rules for a consumer redress scheme where it concludes there may have been a widespread or regular failure by relevant financial services firms to comply with the regulator’s requirements, and where it appears consumers have suffered or may suffer loss or damage as a result.

The obvious answer is that advisers need to be absolutely sure they have all the tools at hand to ensure thorough and ongoing due diligence.
Fund supermarkets typically have no explicit breakdown of charges as the fund managers and/or product provider remunerate the platform, whereas wrap platforms operate either bundled or unbundled prices but usually rebate fund manager or provider payments into the client’s cash account. They then charge for the adviser’s fees separately – usually deducted from the cash account.

Not surprisingly, some advisers and industry commentators have asked how a platform would be able to offer an independent administration tool without breaking the inducements or soft commission rules unless it explicitly charged for it. To have truly holistic coverage would be expensive and time-consuming and so far it has not been necessary to do so.

However, as the RDR states, independent advice must be unrestricted and that will almost certainly mean that more solutions will need to be considered via the platform to ensure the right coverage of product and fund options is available.

If no single platform can offer an unrestricted range, it must follow that advisers wanting to provide regulated independent advice to clients must look at more than one platform or all platforms to ensure the needs of different customers can be met. As clients’ needs change over time, the situation must constantly be reviewed with the best-case platform provider selected and changed accordingly.

The platform market is constantly changing, with new charging structures, wrappers, fund rebates and platforms. It is clear that IFAs will need to actively review and reassess due diligence on a regular basis, possibly monthly or at least quarterly.

More important, no one platform is likely to fit all clients and so a segmentation approach is needed whereby individual client confirmatory checks will be evidenced. Advisers need to be confident of calculating the solution costs under the RDR, not just at initial due diligence but as part of ongoing verification. Reliable tools and agreed methodologies, including reduction on yield calculations, will be required and unauthorised indicatives guesses will not be sufficient.

For any technology provider keen to address this problem there is a need for absolute accuracy and independent validation of the data used.

Without detailed knowledge of how each of the charging structures really works it will be impossible to have accurate reduction in yields.

Platforms offer many benefits to advisers and customers but failing to manage their selection and ongoing use in respect of each customer could mean a ticking timebomb of potential claim, litigation and regulatory sanction. Conversely, if managed properly, platform use could be a major strategic asset to adviser businesses.

William Watling is business development director at Capita Financial Software


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