The Financial Conduct Authority (FCA) has recently launched a market study into online investment platforms (advised and non-advised).

What's this about and why is it relevant to me?

The Financial Conduct Authority (FCA) has recently launched a market study into online investment platforms (advised and non-advised).

The study and its outcome(s) will be of interest to these innovative and increasingly popular firms, as the FCA is keen to understand how they compete to win and retain customers, the effects of relationships between investment platforms and other product/service providers, and how competition and consumer welfare could, if necessary, be improved.

The study will be strategically significant for many investment platforms and related businesses - from those who simply want to understand its implications; to those looking to refine or change applicable sector regulation in their favour; to those seeking to defend existing models and the relationships they support.

What happens next?

While the FCA will approach certain stakeholders pro-actively, interested parties are invited to submit views on the FCA's Terms of Reference and the scope of the study by 8 September 2017.

The FCA will examine online tools and portals through which retail investors and their financial advisors and other intermediaries arrange and administer retail investment products, as well as where information can be accessed to inform investors about future or current investments.

The FCA will analyse amongst other things:

  • whether platforms help investors make suitable investment decisions, and if their solutions represent good value;
  • how platforms compete in practice, how they use their bargaining power to get investors a better deal and what impact platforms have on the overall charges investors pay; and
  • whether relationships between investment platforms, advisers, fund managers and ratings providers work in the best interests of investors, or whether these relationships have the potential to distort competition and lead these firms to prefer their own commercial interests.

The study will also cover product and wrapper providers who use platforms to distribute their products; technology providers to whom platforms outsource services; and fund ratings and data providers whose information is used and distributed by investment platforms.

Following the FCA’s competition findings in its 2016 asset management market study (which raised questions about the complexity of charges and increasing vertical integration between platforms, advisers and asset managers) it is unsurprising that the FCA has decided to examine the related investment platforms market etc.

The FCA believes that aspects of the retail investment sector are becoming increasingly integrated, with commercial relationships existing between platforms, fund/investment managers and advisers. The potential for these relationships to distort competition and result in investor detriment will be considered as part of the study, although the FCA's decision to examine the market reflects its importance to investors rather than pre-judging any adverse competition findings.

Indeed, the FCA has noted that the use of investment platforms has grown rapidly over recent years. As such, platforms and the benefits they offer are key to the industry, the economy and investors as a whole. It is therefore appropriate that vigorous competition and good investor outcomes are preserved; the study is a key step in this process - to enable the FCA to gain a greater understanding of the market and to consider whether any change in future might be merited.

How will it affect me operationally?

The FCA aims to publish its interim report in respect of the study by Summer 2018.

If the FCA provisionally concludes that competition is not working well, it may identify potential remedies to address its concerns and to promote more effective competition.

As well as inviting initial comments by 8 September, the FCA will also gather information through surveys and direct requests for information from investment platforms and other stakeholders. The FCA will host meetings with stakeholders to hear feedback on the Terms of Reference, and whether other issues merit review.

For some, involvement in the study will require focused and expert resource, both to respond in a timely and accurate manner to questionnaires, as well as to evaluate the FCA's direction of travel and to make reasoned submissions where appropriate. While responding to the study may be onerous in some respects, it represents a real opportunity for interested parties to shape the regulator's conclusions.

Finally, those firms called on by the FCA to provide relevant information regarding their commercial arrangements will also need to exercise due diligence (and potentially seek specialist legal advice), as it is important that such arrangements are compliant with competition law generally (and presented in the proper context).

Legal Background

The FCA was granted competition law enforcement powers in April 2015 (alongside those of the Competition and Markets Authority or 'CMA'), although the present study is being carried out under the FCA's separate FSMA powers.

Depending on its findings, the FCA has a range of options at its disposal, for example:

  • introducing new rules, publishing general guidance and recommending enhanced industry self-regulation;
  • proposing the removal of existing rules that create disproportionate barriers to entry, expansion or innovation;
  • taking firm-specific investigatory or enforcement action (whether under FSMA or, indeed, the Competition Act 1998 if anti-competitive practices are suspected); or
  • recommending an in-depth market investigation to the CMA.

Alternatively, the FCA might simply issue the sector with a 'clean bill of health'.

The duration of a market study is usually 12 months (although the fact that the FCA is conducting the present study under FSMA, as opposed to its competition powers under the Enterprise Act 2002, gives it greater flexibility on timings). In any event, should the FCA decide to refer the 'market' to the CMA for an in-depth market investigation, this would prolong the review by a further 18 months.