The British Financial Conduct Authority (FCA) announced on Monday that it is planning to implement new measures to protect consumers in the investment platform market. The measures are a result of the regulator’s interim report on the industry, which identified concerns regarding how investment platforms compete for five groups of consumers.
The watchdog’s proposal includes remedies to help strengthen the extent to which platforms can drive competition between asset managers and measures to increase the ease in which investors and advisers can switch between platforms. Furthermore, the changes aim to tackle price discrimination between orphan and existing clients as well as alert customers who are holding large cash balances.
Groups of concern
Competition between investment platforms has been one of the main protections for consumers. Although this has been working well overall in the industry, the UK regulator is concerned about the following five groups of traders:
- Traders who may benefit from switching, however, find it difficult or costly to do so;
- Investors who use direct-to-consumer (D2C) platforms who want to choose on the basis of price;
- Consumers who use model portfolios;
- Customers with large cash balances who may not be aware they are missing out on investment returns;
- Orphan clients, which are consumers who previously were advised on their trades, but now have no relationship with a financial advisor.
According to the statement, the regulator found that approximately seven percent of traders tried to switch platforms, but were unable to do so. This is due to significant barriers, which limits the pressure on platforms to provide continued value to money.
For D2C platforms, the regulator found that fees were hard to understand and compare, which made it harder for consumers to find cheaper platforms.
For investors who use model portfolios, the FCA found they can be misleading in regards to the risks they may face. This is due to many portfolios using difficult or similar language that does not allow for easy comparison. This can expose the investor exposed to significantly different underlying assets and volatility in returns.
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The report also found that orphan clients have limited ability to access and alter their investments on an adviser platform. This means they are essentially paying for functionality that they can’t use.
Growth of investment platform industry
The measures follow the rapid growth of the investment platform market and aim to address the concerns before they get bigger. This is especially important as investors are becoming more dependent on these platforms to manage their investments, the statement says.
Since 2013 the market has almost doubled in size, and during the same period, 2.2 million new customer accounts were open. Currently, the industry has £500 billion of assets under management.
Commenting on the proposed measures, 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.”
According to the statement, the British watchdog understands that the industry is currently taking steps to allow consumers to easily shop around on the basis of price. This is referring to the implementation of the MiFID II regulation. As a result, the FCA will assess the industry’s progress in these areas before deciding if it will implement additional remedies.
The FCA will publish its final conclusions in early 2019. Before then, the regulator is seeking feedback on its initial findings and proposed measures.