The Financial Conduct Authority (FCA) has published the Terms of Reference for the Investment Platforms Market Study, which sets out the scope and topics that will be covered.
Investment platforms are increasingly used by consumers and financial advisers to access retail investment products and to manage investments. The platform market has steadily grown over the last 8 years, with Assets Under Administration (AUA) for both adviser and direct platforms increasing from £108 billion in 2008 to £500 billion in 2016.
Many platforms offer investors and their advisers a range of information and tools to help them make investment decisions and some also offer their own investment products. As part of the study, the FCA will explore whether platforms help investors make good investment decisions and whether their investment solutions offer investors value for money.
In principle, platforms allow retail investors to pool their money and achieve better investment returns. The FCA will look at how platforms compete in practice and whether they use their bargaining power to get investors a good deal.
To provide investors access to retail investment products and information about these products, platforms interact with other platforms, advisers, asset managers and fund ratings providers. The FCA will assess whether these relationships work in the interests of investors.
For the purposes of this study the FCA defines ‘platforms’ broadly. The study will look at both investment platforms and firms that provide similar services by allowing investors or their advisers to access retail investment products through an online portal.
This Market Study follows on from the Asset Management Market final report published in June 2017, which highlighted a number of potential competition issues in the platforms sector.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:“With the increasing use of platforms, and the issues raised by our previous work, we want to assess whether competition between platforms is working in the interest of consumers. Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice.”
Phil Deeks, technical director at TCC, comments on the FCA’s Terms of Reference (ToR) for the Investment Platforms Market Study: “The scope of the ToR indicates that the regulator is keen to explore the degree to which platforms are designed with the end customer in mind. For intermediated platforms, the FCA will want to understand what governance framework companies have in place and the extent to which they are influenced by advisers or the end consumer.
“It also suggests a potential concern that the features and benefits of the platforms are too heavily geared towards making advisers’ life easier rather than truly developing a platform with the end retail customer in mind. The regulator will therefore examine the industry’s approach to considering customer preferences and behavior at the design stage. Depending on the outcome, this may result in the FCA advocating a RPPD-type consideration or MiFID II-style product governance approach within this market.
“The regulator also highlights the number of charges and revenue stream that platforms make or retain. Given that the Asset Management market study found customers didn’t understand basic charges, it is likely that the platform study will make similar findings and lead to similar remedies.
“Beyond the much-publicised re-platforming issues some firms are facing, the market study may also offer a view on the broader approach to third-party technology and ultimately provide a view on whether propriety or third-party technology solutions are preferable in terms of customer outcomes. While outsourcing tends to be a strong commercial driver, maintaining control over the IT infrastructure, from a developmental perspective, can bring agility and the ability to develop bespoke solutions.
“The market study will also review the role that vertical integration plays in the market. The FCA is likely to be looking at the degree to which vertically integrated firms have identified, and are appropriately mitigating, conflicts of interest. These conflicts will occur at all levels, from firms’ strategy and business model through its proposition design and associated governance and will, ultimately, impact on its interactions with the end retail customer.”
The FCA welcomes feedback on the topics by 8 September 2017. The FCA aims to publish an interim report by summer 2018 which will set out preliminary conclusions and any potential remedies to address concerns.