FCA report calls for more competition in the investment platform market
Do you use an investment platform to manage and administer your portfolio?
These online platforms have become incredibly popular for investors, both for those with and without a financial adviser.
A new market study, carried out by the Financial Conduct Authority, suggests that competition is working well for most consumers using investment platforms.
The FCA did however express some concerns about how these investment platforms are competing when it comes to certain groups of customers.
Because the investment platform market is growing so quickly, the regulator wants to address these competition concerns with some new measures, before the issue gets worse.
In particular, the FCA is concerned about competition not working well for investors who might benefit from switching platforms but find it difficult or costly to do so.
According to their research, around 7% of investors tried to switch platforms but failed in the process.
This was the result of significant barriers to switching, which could (according to the FCA) limit the pressure on platforms to provide continued value for money. After all, if your customers have trouble leaving you, where is the incentive to deliver better value for money?
The FCA also found it difficult for investors to choose a ‘direct to consumer’ platform on the basis of price. They found that those who tried to shop around based on price didn’t necessarily end up with a lower cost platform. This was because platform fees are hard to understand and compare.
Investors who use model portfolios on investment platforms might have the wrong idea about the likely levels of risk and return. This is an issue where similar sounding risk labels are being applied to very different model portfolios.
The FCA found the information that platforms provide about these model portfolios makes comparison difficult, and similar sounding labels (for example, ‘cautious’, ‘conservative’, ‘balanced’) can expose investors to significantly different underlying assets and volatility in returns.
There were also concerns within the interim report about customers with large cash balances who may not be aware they are missing out on investment returns or on the interest they forego by holding cash this way.
It was interesting to note that the report found investors on non-advised investment platforms tended to hold much higher cash balances than those with money on advised platforms.
Finally, the FCA was concerned that orphan clients – customers who were previously advised but no longer have any relationship with a financial adviser – were experiencing limited ability to access and alter their investments on an adviser platform so are effectively paying for functionality that they cannot use.
Investment platforms in the UK currently administer around £500bn of assets. It means the size of this market has almost doubled in the past five years. During the same period, an additional 2.2 million investor accounts were opened on platforms.
With investors becoming increasingly reliant on the smooth functioning of investment platforms, the FCA says it is vital that competition between platforms is working well.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:
This is a market that has seen significant growth in the past five years with more customers than ever deciding to use a platform to manage their money. We know that competition is working well for many but it is important that the problems we have identified are addressed so that consumers don’t lose out.
We have outlined a package of measures today to address the issues we have found, but we also want to see the industry step up, making it easier for consumers to transfer from one platform to another.
In order to address the concerns highlighted in this report, the FCA is proposing a package of measures.
These include proposals designed to strengthen the extent to which platforms drive competition between asset managers, measures to make it easier for investors and advisers to switch platforms, tackling price discrimination between orphan and existing clients and measures to alert customers who are holding large cash balances.
Ahead of its final report, which is expected to be published early next year, the FCA is going to take a look at progress made within the sector.
Commenting on the FCA’s Investment Platforms Market Study Interim Report Justin Blower, Head of Sales and Marketing at investment platform Ascentric said:
It is encouraging that the FCA has recognised the important role of platforms in the value chain and the benefits they can deliver. However, the nature of the platform market, with its diverse range of models covering both adviser-facing and direct to customer platforms, has highlighted that there is no “one size fits all” assessment.
Also commenting on the FCA report, Richard Withers, head of policy at Vangard Asset Management, another investment platform provider, said:
The report makes clear that the investment industry has a responsibility to improve the ability of platform users to make informed investment decisions and help consumers get a fair deal. Otherwise, the FCA has intimated they are prepared to take further action.
Currently, comparing platform costs can be challenging for even the most sophisticated investor. We continue to support the FCA’s call for greater innovation in the way that firms draw attention to costs and charges. Presenting charges in a clear, understandable and prominent way can increase the attention investors pay to charges.
Some recent research carried out by Vanguard found that investors are less likely to switch investment provider than switch provider for home utilities, despite the opportunity to make much larger savings on the former.
With this in mind, improving competition in the investment platform market is of particular importance and should lead to improved consumer outcomes.