This Note examines the key issues arising from the Financial Conduct Authority’s (FCA) interim report on its investment platforms market study and assess how it impacts asset managers.
As a result of its asset management market study, the FCA launched a sub set study to assess a number of potential competition issues in the platforms sector. Initially launched in July 2017 with the scope of the study set out in the terms of reference, on 16 July 2018, the FCA published its interim report (MS17/1.2).
Read the elexica article containing an initial summary of the interim report.
The FCA’s final report is due to be published in Q1 2019. In the meantime, Simmons & Simmons has begun an analysis on how the interim report impacts asset managers. Although the report mainly focuses on potential issues and remedies with regards to advisors’ and investors’ interactions with platforms, there are some direct and indirect implications for the asset management community worth noting at this stage.
Increased pressure for fee discounts
The FCA has identified that platforms have the ability to drive competition between asset managers as a result of both (i) consumer choice through price comparison between platforms and (ii) price negotiation on the part of platforms when securing fund price deals from managers.
The FCA is concerned that current arrangements (ie lack of clarity on price disclosures, as well as most favoured nation arrangements (MFNs) for price arrangements may be limiting the extent to which asset managers need to compete.
Both aspects are under review by the FCA. Managers are likely to see increased pressure by platforms for fee deals, with current contractual arrangements being scrutinised. The FCA welcomes stakeholders’ feedback on MFNs in place with platforms. Developments should be monitored carefully by managers in the final report.
The report particularly focuses on model portfolios. The FCA’s current focus is on in-house models and it has identified the troubling trend of inconsistent risks and expected returns for different model portfolios with similar risk labels.
The FCA is planning further work between now and its final report to explore whether the issues identified with in-house model portfolios might apply more broadly to all types of model portfolios. Depending on what is found, the FCA may introduce remedies to address these concerns, including:
- applying current performance and risk disclosure obligations for funds onto model portfolios, and
- requiring firms to use standardised terminology to describe their strategy and asset allocation, including formalising definition such as cautious, balanced and adventurous.
Managers should monitor these developments to determine whether the content of their current models will be impacted in the final report.
The FCA’s research shows that consumer awareness of platform charges is low. 29% of consumers either (i) are unaware of how much their platform charges are or (ii) think they are not paying charges.
The FCA noted that changes introduced by MiFID II and the PRIIPs Regulation could help solve some of the fee transparency issues. Nevertheless, it is still considering whether further remedies should be introduced to help consumers choose and compare platforms.
Asset managers should wait for further clarity on cost exposures by the FCA. It is likely that further pressure on the platforms to display charges in a particular fashion may impact the manner and method in which costs and charges are delivered by managers to platforms.
One of the FCA’s key finds is that switching platforms is complex, costly and time consuming for both adviser and direct-to-consumer (D2C) platforms. The FCA is, therefore, considering measures to reduce the cost of switching, for example, by banning exit fees and improving ease of switching between share classes (by requiring the ceding platform to first transfer the consumer to the gaining platform’s share class before the switch takes place).
Managers should monitor developments imposed by the FCA to facilitate switching between platforms as it is possible that downstream obligations may be triggered at a manager level (particularly in respect of the ease of switching between share classes in a fund).
The FCA criticised advisers accepting non-monetary benefits in the form of adviser education and training courses, white labelling and bulk rebalancing and model portfolio management tools, highlighting that advisers accepting such benefits would be caught by the FCA’s inducement rules. Rather, the FCA suggested third party courses and educational material on general financial and legislative topics and exam preparation would be more suitable.
While the inducement rules under MiFID II places liability on the recipient, the FCA’s increasingly stringent interpretation on what constitutes an inducement means that asset managers will likely start to experience reduced uptake or even outright rejection of such offered benefits.
It is clear that the FCA wants platforms to drive competition between asset managers, primarily by:
- presenting fund charges in a clear, understandable and prominent way so as to increase investors’ attention to charges
- using platforms’ disclosures of fund charges to consumers as a means to fuel competition between asset managers, and
- assessing the impact of platforms’ disincentive to offer discounts to small platforms following negotiated best or no worse fund prices clauses with big asset managers.
The Investment Association (IA) has identified the continued need for a consistency of approach by the FCA to different parts of the retail market, and for there to be join up between the Platform Study and the Asset Management Market Study.
The deadline for submitting responses to the interim report is Friday, 21 September 2018.
Simmons & Simmons will continue to keep abreast of this hot topic.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.