How the FCA assesses value for money will be crucial to its upcoming platform market study as the regulator prepares to investigate competition in a sector with a wide range of business models.
In its 2017/18 business plan, the FCA revealed it will focus on both direct-to-consumer and advised platforms through a market study to find out how they compete to win new customers and retain existing ones.
The study, which is set to conclude in 2018/19, will also investigate if platforms allow customers to access products that are value for money.
The regulator says it will review last year’s interim report on the asset management market study, which found a number of potential issues relating to competition in the platform market.
The issues identified in that report include complex charging structures, the incentives and ability platforms have to put pressure on asset management charges, and if platforms’ investment tools give customers enough choice.
The business plan announcement follows clear signals the regulator is keeping a watchful eye on the retail platform market. In February 2016, a six-page FCA report on due diligence addressed the concern that advisers are more inclined to retain an existing platform and “retrofit” research to reflect that decision.
In November, Money Marketing reported the regulator was meeting with platforms over fears replatforming projects could cause consumer detriment.
TCC advisory director Phil Deeks, formerly an FCA technical specialist, says the market study reflects the need to supervise platforms differently. He says previously platforms owned by life and pensions companies would have been supervised as part of that overarching company’s activities.
Deeks says: “Cofunds, let’s pretend it was still part of Legal & General, would be supervised by the FCA’s pension and retirement income team. Although it was one of the largest platforms, the regular focus would have been on activity as it formed part of the L&G group, which is massive. So, actually, it wouldn’t receive the same attention it would have if it was outside a large insurer. Some of it is that the FCA probably wants to have more of a focus on just the platforms.”
What is value?
Platform bosses have welcomed the FCA competition study but identified potential challenges to reaching a cohesive conclusion, including how the regulator might define “value for money”.
Zurich retail platform strategy head Alistair Wilson argues each customer has different investment needs and goals and it is important value for money is not just decided on cost but service as well.
He says: “Client needs are different and they change as markets do. As you get more volatility in markets clients may want to shelter their assets into low volatility assets such as cash, so cash accounts become vital. The challenge is that everybody is looking for a different level of service and it comes in different shapes and sizes.”
Transact chief executive Ian Taylor says the varying business models in the platform market mean the FCA will get a range of results from its study.
Taylor says: “There will be a whole series of different charging structures, there will be a range of assets available. When the FCA talks about value for money some platforms will have a narrow range, maybe just of Oeics, whereas there are others with a much wider range of underlying assets.
“Then if you think about whether platforms have the incentive and ability to put competitive pressure on asset management charges, there will be some platforms that will say we are just custody businesses so it is not within our gift to put pressure on fund managers to change pricing.
“Others will say they have specialist recommended lists and other relationships that give them the ability to try and nail down pricing with asset managers.”
Wilson says since the RDR most platforms have worked to reduce the overall cost of investing, particularly through the introduction of clean share classes and discounted deals.
He says: “In that sense, every consumer, regardless of which adviser they went through, benefited from lower investment costs either through the platform directly or through asset managers lowering the price as well.”
Pulling up the shutters
Barriers to switching platforms are key to competition, and both Wilson and Taylor say the regulator will be interested in understanding how easy it is to move clients from one platform to another and what charges are imposed.
Ascentric IFA sales head Justin Blower says there are costs to shifting clients, particularly for advisers.
He says: “From an adviser point of view it is a fully advised piece of work so there is an operational overhead for an adviser, sometimes for a marginal price improvement for the client.
“There is nothing we would do to stop clients leaving the platform.”
Platforum says advisers are reluctant to transfer assets wholesale from platform to platform unless there has been serious client detriment, which it says is rare.
Senior analyst Miranda Seath says: “This is partly influenced by the FCA’s thematic review into the research and due diligence of products and services where the FCA firmly states that advisers cannot place the level of service that the advice firm receives above the level of service received by its clients. So most advisers prefer to place new clients on new platforms rather than moving clients from one platform to another.”
Incentives to keep or attract adviser business also form part of the discussion on competition, and Taylor says there is a long history of platforms reducing charges or offering more competitive deals.
He says: “In terms of winning new clients, I can’t speak for other platforms but we do not provide a differential charge for new clients as opposed to existing ones so if we reduce charges it is for everybody, not just for new clients.”
Altus Consulting senior consultant Ben Hammond is aware of some platforms that will offer advisers a better deal to keep their business if the adviser is considering moving clients off the platform.
He says it is also the job of the IFA firm or network to negotiate bulk platform discounts for clients.
Hammond says: “They should broach the subject and have those discussions but it does depend on the size and how the platform might be able to streamline their operations around that particular client.”
He adds: “If they can find some cost savings, then they should definitely be passing that on to the adviser or the network.
“Some have fallen into the trap of having too much bespoke pricing in the past which then causes problems and makes things expensive to run in the long run.”
FCA needs to be clearer on what is value for money
It should be no surprise the FCA findings suggest platforms have done very little to improve competition and value for money with regards to funds. Most platform providers have a direct interest in maintaining the status quo with regards to investment costs.
Many platform businesses cannot stand on their own two feet. Their sole purpose is to funnel assets into the funds of their asset management business, which are often pricey and mediocre in terms of performance. Of course, advisers have a role to play too. The term “value for money” means different things to different people but the FCA’s expectation on how advisers should assess it is set out in the conduct of business sourcebook.
It says: “In order to meet its responsibilities under the client’s best interests rule and Principle 6 (customers’ interests), a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account.”
The implication is that the current level of charges on most funds is likely to wipe out the benefit. Empirical research puts risk premia on equities at around 3 to 4 per cent and a balanced portfolio will be somewhere in the middle. If the total fund, platform and adviser charges are in excess of 1.5 per cent, that will probably wipe out much of the benefit of investing.
Perhaps the FCA needs to be clearer about what it really means by value for money and be
explicit about its expectations for advisers, platforms and asset managers. The FCA gave a good presentation two years ago on equity risk premium and the impact of cost but this never found its way into Cobs, where it really belongs.
Abraham Okusanya is director at Finalytiq