The regulator, which published the terms of reference for the review last week, is to explore why advisers are not placing more pressure on platforms and fund managers to secure lower investment costs for investors.
Among other things, the terms of reference document includes some strongly-worded passages about vertically integrated firms.
It 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.
“Through the market study we will assess what impact these relationships are having on competition and whether they are working in the interests of investors.”
Of financial advisers more generally, it adds: “We will also consider whether advisers pass the benefits of competition between platforms onto investors in the form of lower adviser and platform fees.”
But there are concerns the regulator may be misunderstanding the market or at least becoming entangled in internal processes.
CWC managing director Clive Waller says that in the case of IFAs, the regulator is at risk of misunderstanding the nature of platforms – for many advisers it is merely a piece of technology and for IFAs at least not a mechanism for exerting pricing pressure.
He says: “They talk, in this paper, about the ability of people to do deals. In another part of the regulatory world, they don’t like people doing deals. Take a pure platform such as Transact. IFAs use it simply as plumbing. While Hargreaves Lansdown and, say, SJP may be selling product, the IFA, by definition, can’t control where the money goes.
“If the FCA is saying they should use their leverage, it disqualifies them, they wouldn’t be independent.”
The Lang Cat consulting director Mike Barrett, also sees some interesting challenges involving vertically integrated businesses. He says some of what the regulator is hoping to achieve could run counter to the business models of many platforms.
“Looking at vertical integration, there is definitely a theme within the paper around the question ‘should we expect the big platforms with scale to be using it to drive down the costs on behalf of the customer?’ We need to do a big piece of analysis to work our way through the pros and cons of all this. But our feeling is that the answer is ‘Probably not’.
“The larger platforms which in theory do have the scale are the ones which are vertically integrated so they are more interested in selling their own funds, rather than making it more attractive to sell what are effectively their competitors’ funds.
“I don’t think it is realistic for those firms to be put in that position just because it is what the regulator is expecting of them.”
He adds that looking at the practicalities of discounting, even where some big platforms have secured discounts, those funds may still be available more cheaply on another platform altogether.
Waller, in the wake of the final asset management review paper which flagged plans for the platform work, told Portfolio Adviser the regulator needed to focus on transparency of costs including for wealth managers. He now argues that we have a classic case of not seeing the wood for the trees in terms of charging and competition.
There is also an argument to say that the sands are already shifting. As Barrett notes, passive’s market share is growing and no-one is going to expect to secure a 7 basis points discount on a passive fund that charges 5bps overall.
Waller says that technology is moving at a very rapid pace, encompassing everything from platforms that may be hosted in the cloud to blockchain, through various forms of robo and artificial intelligence to portable personal data owned and controlled by consumers themselves.
Most specifically for advisers, he says a lot of aggregation once done by platforms is increasingly moving to practice management systems offered by firms such as Intelliflo and Distribution Technology’s Dynamic Planner.
Thus, this world of platforms which the FCA is focusing on could very easily become a “rear view mirror review”. He adds that cutting the FCA back by about 90% would actually help it better identify what it really needs to be looking at.
For Barrett, when you accept that just about every kind of investor whether advised or direct will be utilising some sort of platform then the FCA’s interest is justified, regardless of whether it is correct about all the details.
For IFAs concerned that the regulator continues to worry away at all aspects of what they do, Barrett says that arguably the most important FCA finding of the summer came in May, when the regulator checked on the suitability of advice and apart from some concerns about disclosure of charges, advisers passed muster.
That said, advisers would no doubt prefer it if the regulator was asking the right questions when it comes to its work on platforms because that makes it less likely to jump to the wrong conclusions when it does propose firmer action.