On the 14th March 2019, the FCA published the final report of its Investment Platforms Market Study. It sets out the regulator’s view of the market, outlining how effectively the market is working from a competition perspective. Similar market studies in the past few years have resulted in overt regulatory intervention – ranging from enhanced governance requirements to the implementation of price caps – meaning that the findings of such studies are not to be taken lightly.
The outcome of this particular market study, however, should be seen as broadly positive. The FCA considers that competition is working well within this market and that platforms are delivering benefits to consumers whilst not making excessive profits.
Still, there are some areas that could be improved within the platforms market. These include simplifying charging structures and clarifying how costs and charges are disclosed. The FCA, however, has decided against making immediate rule changes in all areas and is instead open to industry-led solutions which the UK Platforms Group will spearhead.
The FCA has committed to a review in 2020 / 21 that will allow them to see how firms are addressing the issues raised. The FCA did make special note of the fact that it has already seen improvements in the market since the publication of the interim report back in July of 2018.
The regulator found that switching between platforms can be difficult and that consumers can be forced to redeem holdings in investments, incurring dealing costs and potential Capital Gains Tax liabilities, in order to move.
Such costs are clearly against the sixth customer outcome introduced as part of the “Treating Customers Fairly” (TCF) initiative and only add to the complexity that consumers are already facing in terms of costs and charges, so it is unsurprising to see the FCA take action to remedy this. The regulator’s findings also seem to suggest that these exit fees do not correlate to the cost to the firm.
Recent headlines have been hinting at a potential ban on switching fees to come, although this is currently only at an early discussion point.
Firms will need to look at their unit conversion process and ensure it’s fit for purpose as, historically at least, conversions have perhaps been a little problematic.
Clarity of costs and charges has been discussed at length in every area of the financial services industry and investment platforms are no different. Primarily, it seems that inconsistency of terminology is the main driver of consumers being unable to compare prices across a range of providers.
With the UK Platforms Group offering to take forward the initiative in identifying areas of commonality between firms, a more uniform terminology could be relatively quick and easy to agree. The actual implementation of this (requiring an update to marketing collateral and back office systems) on the other hand, is likely to be onerous and will likely require careful planning.
As we’re all surely aware, one of the key drivers for effective competition is customers being able to make informed decisions. As part of the market study, the FCA looked at how investment choices are presented to customers.
“Best buy” lists, for example, should be compiled impartially, especially where vertically integrated firms include in-house funds on their lists. This is hardly a new requirement, and many firms are likely to be already effectively managing conflicts of interest in this area.
The FCA is, however, concerned about how model portfolios are described, particularly around the different terminology used by different platforms. Although there are no remedies proposed at this time, the FCA does reference other work being done in this area with model portfolios structured as funds.
The consultation period on the proposed changes to switching ends on the 14th June 2019. Responses are also invited on the idea of implementing either a ban or a cap on exit fees by the same date.
Considerations for firms
Firstly, your firm should consider responding to the consultation paper on proposed remedies and the discussion section on exit fees. Now is the time to put forward points of view which could be considered as part of the policy development process. Let the FCA know, from your viewpoint, what would work and, equally as important, what wouldn’t? Give reasons for your thinking and examples if you have them.
Spend some time looking at charging structures and the clarity of cost disclosures. Are they clear and understandable to the average customer? The FCA has published a lot of information that should help firms understand its expectations in this area, including the 2015 Smarter Consumer Communications paper and the more recent MiFID II costs and charges disclosures review findings. This also applies, naturally, to how platforms disclose the treatment of cash balances.
Think, as well, about how ‘orphan clients’ are identified, tracked and handled within your firm. Are these customers being offered – and are they receiving – the right service at the appropriate cost? Could the process be improved, either from their perspective or the firm’s?
Analyse how customers are led through key decisions when investing. How are funds presented? Are conflicts of interest appropriately managed or, if necessary, disclosed? Are model portfolios explained clearly and without jargon? Most customers don’t understand the term ‘volatility’, for example, but they will understand that stock prices go up and down depending on a variety of factors. Again, there may be an issue with the consistency of terminology – one platform’s ‘balanced’ may be another’s ‘medium’ – but if the descriptions are clear and concise, this will enable customers to compare offerings.
Finally, identify any improvements that could be made to order-handling processes and best execution monitoring. Best execution, for securities at least, is not solely driven by price and all firms should have appropriate procedures in place to ensure that other factors – such as time and, where appropriate, venue – are also considered when necessary.