Retail platforms review could be 'benchmark' for institutional side

In the final report of its asset management market review, the FCA announced it would extend its scrutiny to investment platforms, and has now published the terms of reference for this. An interim report is due in the summer of next year.

The retail platform market has partly caught the FCA’s attention because it has grown exponentially, to £592bn in 2016, from £108bn in 2008.

Mary Starks, director of competition and the FCA’s chief economist, said the regulator is keen to understand whether competition works.

“What we want to look at is really two things: it’s whether platforms help people make good investment decisions, and whether platforms offer good value for money in terms of their own services,” she said.

The review will cover barriers to entry, commercial relationships, business models and profitability, the impact of advisers, and customer preferences and behaviour. The FCA is not consulting formally but will engage with the industry and welcomes feedback on the topics it has proposed.

Freedoms have changed the dynamic of the market

Tom Selby, senior analyst at investment platform AJ Bell, welcomed the review, saying it was time, following the Retail Distribution Review in 2012, to check the market is working as it should be.

“Clearly the pension freedoms have changed the dynamic of the retirement income market drastically,” he said.

However, he argued that “platforms have acted as a force for good both in the advised and the non-advised space”, giving investors greater choice and a better deal from fund managers. “In theory at least it should mean the fund manager… should be held to account,” he said.

Commercial relationships under the microscope

Andy Cheseldine, professional trustee at Capital Cranfield, also said it was good there is a review.

He pointed out that while value for money is not purely about price, the model of integrated service providers – where investors can buy advice and other services as well as invest – might come under pressure in this review.

Commercial relationships will be one of the focus areas of the review, and Cheseldine agreed this should be looked at.

“It’s not just what you’re charging the member, it’s whether [there are] any commission arrangements from managers, any special terms… so there’s some subsidies that are worth looking at,” he said. “The reason you have a platform in many cases is to sell other products to people.”

Institutional platforms not in the review

Cheseldine argued that although it was less pressing, the FCA should also consider reviewing institutional platforms, used by defined contribution schemes during the accumulation phase.

Institutional buyers generally have “more clout”, with intermediaries negotiating terms on their client’s behalf.

"There isn't an obvious need to include institutional platforms in the review, but they could act as a good benchmark for efficient pooling," he said.

“For consistency purposes, it might be good to cover those as well, because if something comes up in retail platforms that is replicated in institutional, you at least want to know about it”, he added.