UK Conduct Regulator Publishes Interim Report on Investment Platforms Market Study

The U.K. Financial Conduct Authority has published an Interim report as part of its market study to ascertain whether competition between investment platforms is working in the interests of consumers. The FCA launched the investment platforms market study in July 2017 after potential competition issues in the sector were highlighted in the course of its asset management market study, on which it issued its final report in June 2017.

The FCA has been assessing competition in the sector by exploring a range of areas, namely: barriers to entry and expansion; business models; platform profitability; the impact of financial advisers; and consumer preferences and behaviour. Noting the increasing vertical integration in the sector, the FCA has also been examining commercial relationships between platforms, asset managers, discretionary investment managers and financial advisers.

The FCA has found that the market appears largely to be working well for both advised and non-advised consumers and that customer satisfaction is currently high. However, the FCA has found that there are some customers for whom the market is not working as well as it should. The interim report highlights the issues the FCA has identified and consults on proposed remedies. The report is supported by eight annexes covering elements of the FCA's research and findings so far.

The FCA is seeking feedback, considering further work and exploring potential remedies in seven key areas:

1. Making it easier for consumers on direct-to-consumer platforms to shop around and choose platforms on the basis of price. The FCA notes that the costs and charges disclosure requirements introduced by the revised Markets in Financial Instruments Directive should make it easier for customers to compare platforms and does not propose additional disclosure rules. The FCA is interested in whether the MiFID II requirements are encouraging firms to innovate with different ways of providing disclosure. It is also looking at whether the role of third party intermediaries could be enhanced.
2. Strengthening the extent to which platforms drive competition between asset managers. The FCA may introduce further measures to improve the comparability of fund changes and to ensure they are presented prominently.
3. Addressing the position of customers with large cash balances who may not be aware they are missing out on investment returns or foregoing interest by holding cash. The FCA is considering whether its existing rules go far enough in enabling customers to make informed decisions about the interest, charges and potential foregone investment returns on their cash balances.
4. Making it easier for consumers and advisers to switch platforms. The FCA supports ongoing industry initiatives to improve switching times and disclosure. It is looking into the implications of prohibiting exit fees. The FCA is also looking at ways to improve switching between share classes and at how it might clarify its expectations around charging for the adviser's role in switching.
5. Making adviser platforms work better for so-called "orphan" clients (previously advised clients who no longer have a relationship with their former adviser). The FCA will look at the appropriateness of charges levied on orphan clients. It is also considering whether to impose additional requirements on platforms to look at platform usage by orphan clients and levy fees proportionately and whether to require platforms to provide warnings to orphan clients that they may wish to switch to a more attractive proposition.
6. Helping consumers who may be exposed to risk levels they do not expect. The FCA has found that similarly labelled model portfolios offered by platforms can expose investors to very different underlying assets and volatility in returns. The FCA plans to explore this issue further and may introduce measures such as applying risk and performance disclosure obligations for funds onto model portfolios or requiring firms to use standard terminology to describe their strategy and asset allocation.
7. Addressing non-compliance with FCA rules. The FCA is seeking feedback on whether stakeholders consider that its rules go far enough to address non-compliance.

The FCA invites feedback on the issues raised in the Interim Report by September 21, 2018. It expects to issue its final report on the market study in early 2019.

View the Interim Report (FCA MS17/1.2).

View Annexes 1-8.

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