Posted: 14th August 2018
Last month, the FCA published an interim report following its study into the investment platforms market.
As with last year’s asset management market study, there are some findings that are not entirely surprising and will be difficult for the industry to defend, but does this focus from the regulator actually present an opportunity for investment platforms?
It’s an unpopular view, but regulatory intervention or development often brings with it opportunity. The FCA has urged platforms to “innovate” between now and the publication of the FCA’s final report, due in Q1 2019.
A vital part of the value chain
Platforms are an important part of the investment value chain; often acting as the public face of the industry. Over 40% of net flows into funds are directed through platforms. By comparison, most fund operators take in only around 20% of flows directly. Moreover, most—if not all—of the information passed between the fund operator and the end customer is channelled through a platform.
One of the FCA’s focusses in the interim report was on the clarity and transparency of charges on platforms, which should hardly come as a surprise. With different levels of charging for equities, funds, exchange traded products and then further differences (whether you’re dealing by phone or online), securing a suitable price can be something of a minefield. Some of the fees are quoted in pounds and pence, others in percentages. One platform we identified even quotes the custody fee in pounds and pence for its ISA / SIPP account, but a percentage fee for its ‘child trust’ fund.
This is just one example of how a reasonable level of financial ‘savviness’ is required in order to understand the charge types, the scenarios in which they would apply, and how much is really being charged. Perhaps this is one area that would be fairly straightforward for platform providers to review before the FCA feels compelled to consult on remedies.
Price and transparency isn’t everything – but it’s a good starting point
The bad news is that, as noted in the interim report, many platforms are loss making, so there may be a need for some fine-tuning to ensure that producing a clearer charging tariff doesn’t unintentionally shock the bottom line. The good news, however, is that the FCA’s research indicates that platform customers are not solely driven by price and that they will often seek out–and pay for–additional functionality. Here lies the opportunity.
Going back to basics and thinking about what customers want from platforms, and then considering how to deliver it at a competitive price, is key. This may not be a one-size-fits-all investor solution, however. Currently, discounts are offered for frequent traders, but not for those customers who don’t use the available tools or services. Proactively seeking to provide the required levels of functionality and providing a clear, fair pricing structure could help to further drive demand. At the very least, it may stop some customers turning their backs on platforms because of the inherent complexity associated with them.
What else is the regulator focussing on?
Another area highlighted in the report is the difficulty faced by customers who want to switch from one platform provider to another; both in regard to the amount of time taken and the potential costs involved. The ‘Transfers and Re-Registration Industry Group’, comprised on ten major industry trade bodies, is currently exploring the former. Platforms themselves will need to look individually at the latter.
The FCA includes within its interim report various possible remedies in this regard, including banning exit fees. There is no doubt that transferring platforms, as with any type of deal instruction, requires resource and incurs costs, and there’s no suggestion that platforms should bear this cost for their customers.
However, with transfer fees between platforms ranging from £10 to £25 per line of stock (with little or no context as to why the range is so wide), it is difficult to know what is fair and reasonable.
Exit fees should be used to recoup the costs incurred in processing a transaction, not to supplement revenue. Transferring shares listed in an emerging market will be more resource intensive and costly than transferring a holding in a UK domiciled ‘Undertakings for Collective Investment in Transferable Securities’ funds (UCITS), but by applying a flat fee per line of stock, regardless the type of investment that is being transferred, some customers are effectively subsidising others.
And treating customers fairly doesn’t mean treating all customers in exactly the same, for example, through charging all customers the same fee. It actually means treating customers in such a way that their experiences are ultimately similar - hence the shift in recent years to a more outcomes focussed regulatory approach.
By revisiting individual fee models, a platform can reassess what is fair and reasonable across its offering.
Next steps and the final FCA report
There isn’t much time before the FCA intends to publish its final report, but the regulator would likely be encouraged to see moves by platforms that it perceives to be in the right direction.
By going back to first principles, based on the FCA’s approach to conduct regulation, and ensuring competitive markets drive the best outcomes for customers, platforms could get a head-start on delivering a solution that meets everyone’s objectives.