On 16 July 2018, the Financial Conduct Authority (the FCA) published its interim report on the investment platform market1 study (available here) (the Interim Report). The FCA notes that the investment platforms market has almost doubled in size since 2013, accounting for 500bn assets under management and remains a growing sector. The FCA, therefore, considers it vital that competition between platforms is working well. This Newsflash is a high level summary of the Interim Report.

Key points

The key points to note in the Interim Report are that:

  • the FCA is considering going beyond the measures being considered by the Transfers and Re-registration Industry Group (available here) to improve the end users' ability to switch between platforms by banning exit fees;
  • the FCA considers that the MiFID II2 costs and charges requirements should address some of their concerns around it being difficult for investors to shop around and compare the costs of platforms but there is the threat of additional rules and guidance from the FCA if the industry fails to meet the FCA's expectations in implementing the MiFID II costs and charges requirements; and
  • the FCA urged financial advisers and platforms to consider whether the non-monetary benefits that they receive or offer comply with the FCA's inducement rules. Similarly, the FCA said that investment platforms providing stockbroking services to retail investors could do more to consistently achieve and demonstrate best execution results for their customers. The FCA also sought views on what additional work is required to meet suitability requirements above the ongoing suitability requirement. Investment platforms and financial advisers may, therefore, wish to take steps to ensure they can demonstrate compliance in these areas as the FCA is clearly contemplating taking matters into its own hands if firms are found to be falling short of the FCA's expectations.

The FCA's five main concerns 

The FCA sets out five main concerns in the Interim Report. These are set out below, along with the measures the FCA is considering implementing / seeking input on between publication of the interim and final report.

Switching platforms can be difficult

The FCA expressed concern at the significant costs often associated with exiting a platform. The FCA's proposed measures therefore aim to make it easier for end users to switch platforms. These would include, as a minimum:

  • introducing a maximum timescale for each step in the switching process;
  • clear communication to investors from the receiving provider of the switching process detailing the transfer process, timelines and providing a point of contact for questions or complaints.

The FCA notes that the Transfers and Re-registration Industry Group are currently taking these measures forward and notes that publishing data on transfer times would be a further positive step the industry could take. In addition, the FCA is considering:

  • banning exit fees;
  • improving switching between share classes;
  • issuing further guidance to clarify its expectations for adviser charging for switching platform; and
  • what additional work is required to meet suitability requirements above the ongoing suitability requirement.

End users find it difficult to comparison shop for direct-to-customer platform

The FCA is concerned that complicated fee structures can act as a barrier to investors comparing D2C platforms. The FCA notes that the MiFID II cost disclosure requirements will assist with addressing this concern but it wants to see more innovation in the way platforms present their MiFID II costs and charges data, for example, by providing customers with interactive tools to calculate and personalise total charges.

The FCA will assess between the interim and final reports whether the MiFID II costs disclosure requirements are sufficient to address their concerns and drive competition or whether further disclosure / information requirements are necessary.

Model portfolios

The FCA is concerned that similar sounding risk/returns labels attributed to model portfolios can make model portfolios difficult to compare and may mean investors get the wrong idea about the risk they face and returns they can expect. Measures proposed by the FCA to help investors make better choices between model portfolios include applying to model portfolios the disclosure requirements currently applying to funds or requiring the use of standard terminology for model portfolio strategy and asset allocation.

Investors holding large cash balances on investment platforms

The FCA is concerned that investors holding large cash balances on investment platforms may be missing out on investment returns or interest. The FCA is therefore seeking views on whether its existing rules on disclosure go far enough or whether further rules or guidance is required to ensure investors are not building large cash balances without being informed about interest charges and potential investment returns.

Orphan clients

The FCA is concerned that investors who have ceased to have a relationship with a financial adviser but remain on an adviser platform (so called "orphan clients") have limited ability to access and alter their investments on the platform, meaning they face higher charges and lower service.

Measures proposed to help orphan clients include:

  • tackling price discrimination between orphan and existing clients;
  • requiring platforms to have a process in place to get orphan customers to switch to a more appropriate proposition; and
  • requiring adviser platforms to check, if there is no activity after a year, that their customers are receiving an advice service and inform the FCA of orphan clients who are still paying an adviser for advice they no longer receive.

Next steps

The FCA proposes to publish its final report in early 2019. The direction of travel on these issues is clear firms should therefore invest the time to examine the Interim Report and consider its implications for their business model.