Investment Platforms Market Study
In March the FCA published its final report on its Investment Platforms Market Study, which is effectively a review of how investment platforms are servicing investors' needs and what, if any, regulatory action is needed to improve the performance of this segment of the market. Some limited recommendations for regulatory change are being taken forward in a consultation paper published at the same time as the final report (Consultation on Investment Platforms Market Study Remedies CP19/12) but on the whole, the FCA seems to have adopted something of a watching brief on how the platform market is functioning, with the possibility of further remedial action in future if anticipated industry changes do not materialise.
The final report provides a fairly comprehensive review of the material issues which the platform market needs to address and these are reviewed below together with the FCA's considered response to the issues.
The issue of pricing transparency and its importance in driving competition in the asset management industry, has been a common theme for the FCA. In the case of the Investment Platform Market, the FCA has a number of misgivings as to how charging structures are operating. Issues that the FCA considered include:-
- The range of fee types (fixed or absolute fees, or fees fixed as a percentage of investment amounts) and different naming protocols which providers use to describe what are inherently the same types of fees;
- Transparency in relation to fees;
- The range of differently priced services available;
- Concerns about the prominence and clarity given to fee structures - charging should be an important factor in shopping around for consumers and therefore any lack of clarity is not helpful to the market.
Having considered the case for more regulation in this area, the FCA has stepped back from further regulation. It is keen to see the industry develop a common model for describing and treating charges and is prepared to allow the industry as a whole, time to work on these matters. It notes a number of encouraging steps in improving transparency and clarity.
Other areas it would like to see improvements in, are how the treatment of interest earned on cash holdings is presented to investors and the exploration of more simplified pricing models.
The FCA considers the ability to switch providers as a key issue in improving the competition among platform providers and a way to ensure that investors can choose the right provider for them. Areas of concern include:-
- Improving the process for switching- it currently takes too long, is relatively complex and can be expensive;
- Exit fees;
- Issues surrounding specific unit classes only being available to certain platform providers and not capable of transfer to new platforms.
The FCA notes its support for steps being taken to improve transfer and re-registration times in the industry generally and recognises the steps taken by the fund industry to improve efficiency and communications. The FCA is prepared to give these industry initiatives time to bear fruit.
However it wants to make a more direct intervention in two areas and the consultation paper outlines the remedial steps that the FCA is proposing, to improve the investor experience of switching.
The FCA is proposing to bring in new rules that will make it easier for investors to transfer units in specie rather than having to cash out of units on one platform and perhaps invest in a different class of units in the same fund on the new platform. This can be a particular problem when one platform provider has negotiated specific fee rates for its platform and these are reflected in the class of units made available to its users. The FCA is proposing that investors should generally be given the option of in specie transfers, and where there are different classes of units for a fund available in the receiving platform, steps must be taken to ensure the transfer can be achieved by means of conversion between the two classes of unit. In particular, the proposed rules will require that:-
- The platform must offer investors the choice of transferring in specie where the same fund is available on both the ceding and receiving platform;
- Where the receiving platform and the ceding platform have different classes of unit available through the respective platforms, then the ceding platform should ask a fund manager to carry out a conversion;
- Where the receiving platform offers a discounted share class, the investor should be given the opportunity to convert into that share class.
On the issue of exit fees, the consultation paper does not make firm proposals but instead raises issues for discussion on how to implement a restriction on the use of such fees. The FCA notes that a ban on the imposition of exit fees for new business would help remove a barrier to switching. While there are costs incurred in managing the transfer process for the platform provider, these costs can be effectively recovered in general fee rates.
The FCA is proposing that should a ban be introduced, it would apply not only to platforms but also to all firms offering retail distribution services similar to a platform. This would include the population of firms that deal, arrange deals or manage investments for and on behalf of retail customers, where the services include the safeguarding and administration of investments. The ban would not apply to exit fees embedded in fund products.
As a result of this extension of scope, the FCA is treating the proposals on this matter as a discussion paper and is looking to gather responses on issues, such as what is an exit fee; the type of firm that the restriction should apply to; and whether there should be a ban or simply a cap on the fees that may be levied. The view of the FCA is that a cap or ban should apply to all fees levied in connection with exit, regardless of description.
The FCA has raised some concerns about the treatment of orphan clients on advised platforms; these are clients who have been introduced to a platform by their adviser but the relationship has subsequently ended. Among the concerns expressed by the FCA, is the danger that such clients may continue to be charged adviser fees although the relationship no longer exists or that the service is not being used properly after the adviser has ceased to perform a role.
Having posed the questions, the FCA seems to accept that there are normally sufficient controls to prevent platforms continuing to charge adviser fees to orphan clients. In addition, the FCA seems satisfied that where an orphan client is left on an adviser platform without an adviser, most platforms have protocols to ensure that the client is still best served by remaining on the platform. The FCA noted that it would not always be in the investor's interest to switch to a direct to consumer platform. At this stage, the FCA simply highlights the responsibilities that it expects platforms to fulfil in this situation.
Another area that the FCA highlights is whether there is an issue with non-monetary benefits paid to advisers for using platforms. The FCA reviews some of the benefits made available to advisers but concludes that based on its findings, the rules restricting non- monetary benefits are being observed and there is an understanding among platform providers, as to what is and is not, permitted.
Informed Investor Choices
The FCA has considered how fund charges, as opposed to platform charges, are dealt with. Again it had some concerns that these are not being disclosed in as effective a manner as possible. However once more, the FCA has delayed taking further action until MiFID II has bedded in and it is able to assess how the industry as a whole develops disclosure in this area.
The FCA has also considered best buy lists and whether the inclusion of in-house funds can create conflict issues. While it recognises the issues, it has decided again to let MiFID II changes take effect and notes that there are existing duties on managers to manage conflicts. It reinforces the view that it expects such lists to be constructed on an impartial basis.
The issue of model portfolios is also considered. In particular, the FCA had concerns as to how non _ advised clients were able to compare and contrast different model portfolios and how information is presented to them. The FCA recognises that the model portfolio market for non-advised clients is comparatively small and it considers that, for the moment, work on better disclosure for the fund market as a whole should be sufficient. Proposals for greater clarity are being brought forward in Policy Statement 19/4 to improve descriptions of fund policies and objectives.
Another area which the FCA highlights should be kept under review, is the issue of trading execution and whether platforms are taking sufficient steps to ensure that they secure best execution results for their clients when trading securities. The FCA will be considering this matter from a supervisory perspective, rather than introducing specific regulatory changes.
Finally, the FCA considers the position of cash balances being held, clearly highlighting the lost investment returns that holding cash for a lengthy period may entail. The FCA reviews some of the research it has conducted on how large cash holdings arise and focuses particularly on cash being held in pension drawdown accounts. However, it considers the action being taken elsewhere in its Retirement Outcomes Review, Investment Pathways should address the harm arising from holding cash for long periods. It states that it is less concerned with cash being held in non-pension accounts; it notes the consumer journey is different and there is less potential for harm as non- pension clients tend to hold onto cash for shorter periods.
The FCA has also considered in its review, the arrangements between fund managers and platforms, the prevalence of discounts offered to some platforms and pressure being placed on managers not to offer lower discounts on other platforms ("Most Favoured Nation Clauses"). The FCA has some concerns about the latter type of arrangements in particular and while taking no specific action at this time, it has reminded firms of their obligations under competition law.