Groundhog day

Another day, another FCA paper, this time the snappily titled Investment Platforms Market Study Terms of Reference (MS17/1.1 to its mates). We’d heard talk of a deluge of regulation arriving once the FCA emerged from purdah and, since 21 June when the DB transfer consultation was published, we’ve now been treated to almost 500 pages of reports covering pensions, asset management, MiFID, and now platforms. By the time you add in the supporting documents that’s almost 2,000 pages to wade through. I wonder why the industry finds it hard to innovate!

Anyway, as the name suggests, this paper is looking closely at everyone’s favourite topic, platforms, with the study originating from the competition arm of the FCA. This is an important point, not only with regards to the topics under discussion and expected outcomes, but also potential next steps. These could include rules, general guidance or enhanced industry self-regulation. Or if a bigger stick is needed, removing existing rules or even a market investigation reference to the Competition and Markets Authority. This feels unlikely, as does the option to do nothing. It’s pretty clear however, that the FCA doesn’t believe all is as it should be in platform land[1].

The study will centre around two main questions:

  • How do platforms and similar firms compete on the price and quality of the services and products they offer, and the products over which they have influence? and
  • Do platform and similar firms’ investment solutions offer investors value for money?

Reading between the lines it’s tempting to answer ‘not very well’ and ‘no’ respectively, and you can’t help wondering whether the more detailed areas of focus are structured to prove (or disprove) a problem the FCA is not entirely sure exists. Whilst the areas of focus are wide-ranging (and for what it’s worth cover all the issues we wanted to see) most of them come down to one topic, the impact of vertical integration (VI) on the market and investors.

VI is mentioned on page 3 (section 1.6), with the FCA noting ‘these relationships have the potential to distort competition by encouraging platforms to compete in the interests of those with which they have a commercial relationship rather than in the interests of the consumer’. Most people would probably agree that this is true (or at least that the potential exists) but it’s also true to say that VI is the dominant business model in the platform market. Of the top 10 advised platforms (by AUA), 7 have an asset manager within the same group. As do all of the top 5.

In this context, how reasonable is it to be expecting these firms to be, negotiating competitive prices on investment charges? If a provider’s (perfectly reasonable) business strategy involves selling its own funds, is it reasonable to expect it to get discounts from a competitor? And if you are the competitor, do you want to give up margin where the platform can only go so far to influence flows?

It all, of course, comes down to the customer outcome. On one hand, any discount is better than a kick in the swingers, but not so if you are paying a higher than average platform price which dilutes the impact of that discount to the point of non-existence. We wrote a paper on this very topic two years ago, and in particular noted that the larger ‘scale’ platforms, who are the ones supposed to be able to secure the discounts, carry an above average platform price. And price is not a determinant of flows. Quite the opposite in fact. The more expensive platforms are the ones with the strongest flows. We are in the process of refreshing this research, so watch this space (or call us if you’re really excited).

Overall there is plenty for the industry to ponder and respond to prior to the 8 September deadline. However, as noted above, there is an increasingly complex and confusing regulatory jigsaw being constructed. Platform Market Study, Asset Management Market Study, MiFID, Advising on Pension Transfers, Retirement Outcomes Review etc., the list goes on. There is a lot happening, and a lot of it overlaps. Reading regulatory papers is not top of most peoples list of things to do during the summer. If the FCA really wants to get the ‘well-functioning market’ it is seeking then it needs to do more to explain exactly what this means and to piece together all of the work it is undertaking.

Finally, the FCA are not the only people who have been issuing papers today. The Financial Services Consumer Panel have published their research into competition and consumer behavioural biases in which they state that ‘Firms appear to compete vigorously, but they strive to inhibit consumers’ ability to shop around, by developing complicated products, with obscure or misleading prices and terms and conditions’. Ouch. As a result they, call for ‘The FCA to be tough on firms that penalise their loyal and trusting customers’. Double Ouch.

The main theme of both the platform and asset management market studies is competition, yet it’s clear the Consumer Panel have concerns about whether this alone can deliver positive outcomes. Both papers feel like positive steps, but when the Consumer Panel is saying “The fiction that consumers can and will drive competition has persisted too long. We need tough action now, questions must be raised as to whether the current burst of regulatory action is actually going to be effective.


[1] Worst theme park ever.