For those who have yet to tackle the 400 pages of regulatory material, Mike Barrett of the lang cat assesses the key areas of interest
Deciding on what to read whilst you were on your summer break can be a big decision. If you had a nice long flight, and some even nicer time on the beach to look forward to, the quality of reading material is a vital factor to consider. Do you go for something trashy and low-brow, allowing you to switch off your brain completely, or perhaps a decent non-fiction, where you might learn something as a result? And if you are really lucky you’ll be able to learn something that you’ll actually remember now as you trudge back to work in a post-holiday slumber.
Fortunately, if you are remotely interested or involved in platforms and asset management, the FCA have got your back. Not literally – even those on the supervision team don’t have stalking powers – however it is clear they are big fans of ensuring the industry has loads of reading material just in time for their summer hols. Last year we were treated to the Asset Management Market Study final report (a real hoot, unless you work for an asset manager), and this year the spin-off follow up was published towards the end of July, The Investment Platform Market Study interim report. With over 100 pages forthe report itself, supplemented by a further 260 pages of supporting research there was plenty for the industry to ponder. Just in case you did decide to go for the trashy novel instead of some work-based reading, here are the key things advisers need to be aware of.
The first thing to remember is that this is a competition market study. The FCA are one of the few financial regulators in the world with a core objective to promote competition within the markets they supervise, the belief being that effective competition benefits consumers and the wider economy. This means the tone and pace of the work is a bit more gentle than you might expect – this isn’t a supervisory exercise going after obvious consumer detriment. In fact, the supporting consumer research shows that most clients are happy with the outcome they are receiving, from both advised and D2C platforms. Overall there is nothing for advisers to panic about. There are no imminent rule changes, or indeed a consultation for any potential rule changes. If you are working with platforms you don’t need to make significant changes as a result of this paper, but there are a few emerging themes you should be aware of.
As well as these emerging themes, the report does highlight some “potential areas of non-compliance with existing rules”. These centre around non-monetary benefits, with adviser training, white-labelling services & bulk rebalancing services cited as potential problem areas. Adviser firms need to demonstrate that these benefits are acceptable minor non-monetary benefits, for example because they an enhance the quality of the service to the client and will not impair the firm’s compliance with its duty to act in the client’s best interests. Since these are current rules (updated at the start of the year as a result of MiFID II) advisers should look to ensure that they are compliant asap.
Beyond that, the report identifies five groups of consumers for whom the FCA are concerned that competition is not working effectively. These are:
- Switching between platforms can be difficult.
- Consumers who would benefit from switching can find it difficult to do so.
- Shopping around can be difficult. Consumers who are price sensitive can find it difficult to shop around and choose a lower-cost platform.
- The risks and expected returns of model portfolios with similar risk labels are unclear. Consumers using these model portfolios may have the wrong idea about the risk-return levels they face.
- Consumers may be missing out by holding too much cash. Consumers with large cash balances on D2C platforms may not know they are missing out on investment returns, the interest they lose or the charges they pay by holding cash in this way.
- So-called “orphan clients” who were previously advised but no longer have any relationship with a financial adviser face higher charges and lower service.
Advisers will note that the majority, if not all, of these consumers fall into the D2C market, although there are some crossovers into the advised world, especially for the orphaned group. The potential remedies could, however, impact advisers more widely. For example, point 1 should (eventually) lead to improvements in the process of moving from one platform to another, and is posing questions about the advice process involved as well as proposing a ban on any platform exit fees that might be levied. However, as with most of the report, no change is imminent.
And this is where, in our view, the work falls short. It’s right that the FCA takes an in-depth look at what is an increasingly important area of the market, however 12 months on from the initial terms of reference the study is still asking many of the same questions it originally posed. The next step will be a final report, due to be published at some time in Q1 2019. If there are to be any potential rule changes these will then go into consultation, so realistically we are looking into 2020 before anything actually happens as a result of this work. By which time the market could have well moved on significantly.
We would like to see a bit more focus on this work. If there are areas that need to change, get on and make the change. One way to help this momentum might be to separate out the study into separate exercises looking at the direct and advised markets in their own right. These markets are fundamentally different, especially with regards to the responsibility and protection the consumer has in place. They need to be regulated more specifically. And for advisers, we would like to see more in the way of good/ poor practice examples that clearly set out what advisers should be doing. With the best will in the world, not every adviser was going to wade through 400 pages of regulatory material whilst on their summer holidays, and the FCA need to recognise this.
About Mike Barrett
Mike is consulting director and sole-proprietor of the lang cat Isle of Wight office. A driver and survivor of platform mergers, migrations and RDR, he held a number of senior roles at Skandia and Old Mutual Wealth. He is now working with platforms, advisers, banks and asset managers to help them create and communicate in a way that is a little less corporate and a little more human.