Today's announcement by the Financial Conduct Authority (FCA) of an imminent investment platforms market study does not come as a surprise, and is arguably long overdue.
The FCA itself recognises that ‘the retail investment sector has been affected by a number of regulatory changes in recent years’ and it's probably fair to say that not all of these changes have had the intended outcome.
Within the retail investment market the existing platform and suitability rules have been in place for a number of years.
Most of these rules were written before the retail distribution review (RDR), and all were written before the pension freedom reforms were implemented.
Whilst they do not require wholesale change, there is a need to better reflect how advisers are using platforms and the changes in platform business models. The market, adviser and consumer behaviour has evolved, and regulation needs to catch up.
What will the review look at?
At this stage there is very little detail, however there are a few clues.
Overall, the FCA has a single strategic objective – to ensure that relevant markets function well, underpinned by three operational objectives:
- Integrity – to protect and enhance the integrity of the UK Financial system
- Promote competition – to promote effective competition in consumers’ interests
- Protect consumers – to secure appropriate protection for consumers
My bet is the investment platforms market study will focus on the last two objectives, and in particular, look at the issues of competition and value for money in the platform market.
Platforms are not yet fully commoditised, but they are not far off from being so. Most contain broadly the same functionality, and most broadly charge the same amount. Service remains a differentiator (although often it is more about picking the best of a bad bunch) but the reality is the platform market is a tough one, and has failed to deliver real benefits for providers, advisers or their customers.
Value for money
The question of value for money is likely to be one of hottest topics over coming months.
Providers with low cost products will continue to highlight the damaging compounding effect charges can have over the long term, and providers of more modestly priced solutions will talk about how price isn't everything.
Of course, both are right, but it is clear the FCA is becoming increasingly concerned about whether products and services offer ‘value for money’. What this actually means, and what constitutes an acceptable level of charges remains to be seen, but the ‘VFM’ phrase is becoming ubiquitous in FCA documentation.
It is mentioned with regards to the platforms market study, it is a central theme of the asset management study, and even (some) advisers are now attracting attention.
Rightly or wrongly, this feels like the direction of travel, and if so, the transparency of charges will quickly become hugely important. If there is to be an increasing focus on value for money, the first stage is to clearly disclose the charges so that a value judgement can be made.
This will require all market participants, asset managers, platforms and advisers to work together, and if the FCA feel changes are needed it is important clear guidance and rules are issued.