Following on from the publication of its final report in the Asset Management Market Study in June 2017, the Financial Conduct Authority (FCA) announced on 17 July 2017 its Terms of Reference for a competition probe into the online investment platform market.

The Terms of Reference set out the scope for the FCA’s new Investment Platforms Market Study.

What will the FCA be examining?

For the purposes of the investigation, “platforms” is defined widely. In this case, platforms are online tools or portals through which retail investors and their financial advisors can arrange, administer, access and manage retail investment products, as well as where information can be accessed to inform investors on their future or current investments. This therefore captures online investment “supermarkets”, like Nutmeg.

In light of such expansion, the FCA has announced this probe to examine (amongst other things):

  • how platforms compete to win new business and retain existing business. In particular, the FCA will look at whether platforms offer investors value for money;
  • how platforms negotiate with product providers (e.g. funds), and whether they are able and willing to negotiate a competitive price on investment charges. The FCA will also examine whether these relationships work in the interests of the investor;
  • whether the platforms actually allow investors to make good investment decisions;
  • whether the fact that platforms generate profit by charging a fee on the assets they administer on behalf of investors, and through trading charges and fees, affects competition or has negative effects for investors;
  • whether platforms enable consumers and advisers to assess and choose products which offer value for money; and
  • whether customers face any barriers to switching platforms, and whether challenger platforms therefore struggle to compete.

Why is this important?

Given the FCA’s conclusions of weak price competition in the asset management market study, it is unsurprising that the FCA has looked to launch a fresh investigation into a related market to scrutinise the relationship between the online investment platforms and fund managers. In its Terms of Reference, the FCA identifies that vertical integration in the platforms market is becoming increasingly prevalent, which could give rise to concerns downstream.

The FCA has noted that the use of such platforms has grown rapidly – in 2008, £108 billion was managed through platforms; by 2016 this had risen to £592 billion. This now accounts for around 78% of the retail investment market.

As such, investment platforms are evidently vital to the industry as a whole. Given their importance, the FCA is keen to ensure that competition is effective and working in the interest of investment customers and consumers.

Next steps

The FCA aims to publish its interim report on its preliminary conclusions by summer 2018. If the FCA provisionally concludes that competition is not working well in the market, its interim report will also detail potential remedies to address its concerns and to promote more effective competition.

In the short term, the FCA has invited any comments on the Terms of Reference and the scope of the investigation by 8 September 2017.

The FCA’s full Terms of Reference for the Investment Platforms Market Study can be found here.