In this issue, Rory Percival examines the FCA’s findings in its recent platforms market study
The UK Financial Conduct Authority (FCA) is steadily moving around financial services, undertaking market studies. These assess whether competition is working effectively in the interests of consumers. Recently, we have seen reviews of the retirement income market and the final report of the asset management market study.
This article reviews the findings of the platforms market study, focusing on the implications for advisers.
Investment Platforms Market Study MS17/1.2
After nearly a year of research and analysis, the FCA published an interim report on the platforms market in July 2018. The final report is due in Q1 2019. The FCA flags a number of positive findings in the interim report. It concludes that the “market appears to be working well in many respects” and this influences the proposed actions – a more problematic market would have resulted in more drastic steps.
It also reveals that customer satisfaction is high, although there are still some issues, in particular low levels of understanding about charges. The report also concludes that more functionality is available with the more expensive platforms.
The main issues the FCA finds are:
Switching: Switching between platforms can be difficult and time-consuming. When advisers find they want to use a more competitive platform, they tend to use the new platform for new clients but do not switch existing clients. As a result, the existing clients are left with an inferior platform and possibly higher charges (platform and/or funds).
Orphan clients: Orphan clients that no longer have a servicing adviser typically face higher charges and lower service. Also, platforms might be facilitating ongoing adviser charges for clients that are not receiving an ongoing service.
Inducements: The FCA finds that some services may involve banned inducements. The FCA is particularly concerned about training courses, white labelling, bulk rebalancing, and model portfolio management tools. It feels that these services are likely to benefit advisers but not necessarily their clients.
Advice is unlikely ever to become a demand-led competitive market like car insurance
The FCA suggests a number of remedies. These are not proposed policy changes, so no new proposed rules or guidance at this stage.
Easier switching: The FCA is interested in reinforcing the Transfers and Re-registration Industry Group’s initiative to improve switching processes. This would involve end-to-end standards for transfer and re-registration, including a maximum timescale and also clear communication to clients about the process.
The FCA is also considering banning exit fees.
The FCA also flags advisers charging for switching platforms. It recognises that firms need to be paid for work but also says: “It is not clear to us why meeting suitability requirements to switch platforms should outweigh the benefits of switching.” Hence, it will be considering adviser charging guidance on switching.
Help for orphan clients: The FCA is considering requiring platforms to have a process to encourage orphan clients to switch, as well as to alert the FCA if there is no action on a client case by the adviser for more than a year, where an ongoing adviser charge is being facilitated. Inaction for this prolonged period may indicate the client is not receiving an ongoing service despite an adviser charge being paid.
Inducements: No remedies are indicated here. The rules are in place and the FCA indicates that firms need to assess whether they meet the rules. This may be discussed further in the final report but the FCA has very little scope to add guidance to MiFID II rules.
There are a number of areas where the FCA flags that it is interested in industry innovation or solutions. In addition to the Transfers and Re-registration Industry Group, it also referred to innovation in the direct-to-consumer market to make it easier for consumers to shop around, as well as around ways to improve fund competition. It is positive that the FCA is encouraging market innovation and solutions rather than just introducing new rules to fix problems.
Adviser market study
This is likely to start in 2019 and will be a wide-ranging review of the advice market. The findings from the platforms and other market studies provide us with some indications as to what the FCA will find when it undertakes the adviser market study.
The FCA will likely find indicators of a non-competitive market: weak price competition; little correlation between price and quality; and little correlation between price and demand. It will, however, probably find high consumer satisfaction but a poor perception of fees by consumers, despite RDR improvements to fee disclosure.
Remedies to improve competition will prove problematic, given the referral and trust basis of the sector. Advice is unlikely ever to become a demand-led competitive market like car insurance. Hence, the FCA will get firms to internalise the value for money challenge. The PROD Handbook already exists to require firms to do this.
Improved consumer understanding of fees is likely to improve anyway following MiFID II requirements for restatement of adviser fees annually. The sector could also take the lead and improve standards, giving the FCA less need to bring in new rules and guidance.
Rory Percival of Rory Percival Training & Consultancy Ltd