FCA publishes Terms of Reference for investment platforms market study
The FCA's new competition probe into investment platforms seeks to examine all aspects of online retail investment distribution.
On 17 July 2017, the Financial Conduct Authority (FCA) published its Terms of Reference for its Investment Platforms Market Study. The FCA proposes to take a closer look at the role of platforms in the retail investment market and what the parameters of competition are between different platforms.
The proposed market study into investment platforms follows on from the FCA’s very recent Asset Management market study. Although the Asset Management market study final report only came out a few weeks ago, on 28 June 2017, the launch of this new market study suggests the FCA is keen to build on the dialogue it has already created with the asset management industry.
What is a "platform"?
The FCA’s Terms of Reference specify that the FCA will look at both "platform service providers", but also all other firms that allow investors or their advisors to access retail investment products through an online portal. A "platform service" is defined by the FCA as “arranging, safeguarding, administering investments and distributing retail investment products which are offered to retail clients by more than one product provider. The service is neither solely paid for by adviser charges nor ancillary to the activity of managing investments for the retail client”. This definition is relatively broad, in order to capture all of the firms and services the FCA is interested in looking at.
Indeed, the FCA recognises that platforms are a part of a wider distribution landscape, including wealth managers, insurance firms, banks and asset managers with a direct route to market. The study will therefore cover all firms and retail investors that access or offer access to retail investment products through an online portal and intermediaries who use platforms to access retail investment products on behalf of their clients. The FCA will also look at "wrapper providers" who use platforms to distribute their products, technology providers to whom platforms outsource services, and fund ratings and data providers who sell information to platforms for use and distribution.
Key themes
The FCA is keen to look at how platforms affect the overall charges paid by investors and the implications of vertical integration among platforms, funds and advisors. It is particularly concerned with the incentives generated by commercial relationships that exist between platforms, asset managers and financial advisors. The FCA has concerns that these relationships have the potential to distort competition by encouraging platforms to favour the interests of those with which they have commercial relationships, rather than focusing on the interest of the consumer.
The key topics explored through the study will include:
- Barriers to entry and expansion: whether large platforms benefit from economies of scale and if new entrants struggle to match; do technology providers make entry and expansion easier or harder; and do platforms face a competitive disadvantage when competing for investors because of regulation?
- Commercial relationships: are platforms able and willing to negotiate competitive prices on investment charges; do commercial relationships drive investment choices and what are the implications for investors; and how do platforms select which product wrapper to include on the platform?
- Business models and platform profitability: do drivers of profitability affect firm incentives, the factors over which they compete and what are the implications for investors?
- The impact of advisors: do adviser platforms compete in the interest of the end adviser; whether advisers have a positive impact on the cost/quality of the platform and are these benefits passed through to investors?
- Customer preferences and behaviour: do platforms enable consumers and advisers to assess and choose distribution and investment products which offer value for money; do challenger platforms and similar firms struggle to compete as customers face barriers to switching?
Next steps
The FCA is not formally consulting on the Terms of Reference, but is happy to take industry views and opinions. Any feedback on the Terms of Reference should be submitted to the FCA by 08 September 2017.
The FCA hopes to have an interim report by summer 2018, which will identify any preliminary conclusions and possible remedies (if it feels these are necessary).
