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FCA launches probe into DIY investment platforms

The FCA is investigating a potential lack of competition among DIY investment platforms
July 27, 2017

The Financial Conduct Authority (FCA) is putting DIY investment platforms under the spotlight in a wide-ranging probe following allegations that the platforms are not acting in investors' best interests.

The FCA said in the Terms of Reference for its Platforms Market Study it wanted to "look at how platforms compete in practice and whether they use their bargaining power to get investors a good deal". Issues like entry and exit fees charged by platforms, the range of investments offered and barriers to switching are likely to come under scrutiny.

The platform investigation follows the findings of the FCA's Asset Management Market Study, in response to which asset managers said the regulator should scrutinise platforms as well as funds, highlighting issues like "the complexity of charges, increasing vertical integration between platforms, advisers and asset managers, and the value for money of model portfolios" in the platform market.

DIY investment platforms have become increasingly powerful in recent years with more investors using low-cost online brokers to buy and sell investments. Assets under administration for both adviser and direct platforms have expanded from £108bn in 2008 to £592bn in 2016. And platforms offer a number of benefits, including their ability to pass on fund discounts to investors.

However, the charges platforms levy can be confusing and lack transparency. And their increased might in the market has led to questions over their often complex pricing models, the range of services they offer and whether they are doing enough to foster competition. 

The FCA says: "The platforms market is becoming increasingly vertically integrated, with commercial relationships existing between platforms, asset managers, discretionary investment managers and financial advisers. These relationships have the potential to distort competition by encouraging platforms to compete in the interests of those with which they have commercial relationships rather than in the interests of the consumer."

The FCA is now asking for feedback and will publish an interim report in summer 2018, when it will set out its findings and lay down potential sanctions and remedies for platforms.

Tom McPhail, head of policy at broker and platform Hargreaves Lansdown, said they welcomed the report but the issue of what constitutes a platform could prove tricky for the FCA investigation.

"The FCA is right to be looking at these issues now: platforms have become such a critical part of the investment landscape for millions of investors it is important to make sure they are getting good value," he says. "What exactly a platform is remains an open question. The scope of this market study could end up with a pretty broad definition of what constitutes a platform: basically if it walks like a duck and quacks like a duck, the FCA will probably look to regulate it like a duck."”

The FCA says it will be "defining platforms broadly" as "both investment platforms and firms that provide similar services by allowing investors or their advisers to access retail investment products through an online portal".

Verona Smith, head of platform at Seven Investment Management (7IM), says: “The meteoric rise of platforms has placed them at the cornerstone of the investment management industry – it’s the way we all invest, whether via advisers or direct. So it is absolutely right that the FCA puts platforms under the microscope. The focus on barriers to competition, commercial relationships and costs is absolutely crucial."

Justin Modray, director at Candid Financial Advice, says: "Investment platforms have generally been a brilliant innovation for investors. Aside from greater convenience, they have also cut costs by giving the public access to cheaper fund versions previously only enjoyed by professional investors. Someone investing directly with a fund manager typically pays annual fund charges of around 1.6 per cent. But buying the same fund via a platform usually cuts this to around 0.85 per cent, giving a significant saving – even after typical platform charges of 0.25 per cent to 0.45 per cent a year."

But Mr Modray added that the FCA should clamp down on the potentially high percentage-based fees levied by platforms on investors. "While percentage fees might prove cost effective for smaller sums, they often become high on larger investments," he explains. "As a rule of thumb, fixed fee platforms tend to become cheaper for individual savings account (Isa) portfolios above £40,000 – £60,000 [in size]. Fixed fee platforms such as iWeb, Interactive Investor and Alliance Trust Savings show that this can work, which seems a much fairer way to charge for an administrative service."

However, John Blowers, head of Trustnet Direct, thinks "that the platform market is operating quite efficiently and price competition among a wide variety of suppliers has seen falling costs for retail investors. However, there are some concerns beginning to surface that may negatively affect investors going forward. The likely market consolidation could see fewer platforms, and with the cost of the underlying technology rising massively only the very largest institutions may end up surviving, potentially causing price rises and a reduction in choice."