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Where do you stand on the great platform debate?
08 September 2010
Will Roberts examines the main points of contention and asks if platforms will have enough time to adapt to the new rules before the RDR deadline at the end of 2012? As the IFA industry hurtles towards the 2013 finishing line, the RDR promised land comes into ever-sharper focus. But the platform community – a major feature of this brave new world – is less well defined, hiding behind a mist of regulatory uncertainty. It is hard to overstate the importance of platforms. Not only are they intrinsically bound with the RDR, spearheading the regulator’s relentless drive to a transparent market, but they are now an essential component of an adviser’s business. Indeed, it is difficult to see how an IFA firm could function effectively without one. “I cannot see how an adviser can give consistent advice at the right price without a platform of some sort,” says Ascentric chief Hugo Thorman. Furthermore, wraps are fast becoming embedded into the country’s financial fabric. “By the time the RDR is effective, several banks will have wraps and within five years they all will,” adds Thorman. Given the importance of platforms both to the RDR and IFA community, it remains a source of concern to operators and advisers alike that the regulatory framework governing their make-up and structure has yet to be finalised. The industry has been waiting with bated breath for publication of the FSA’s platform consultation paper. The paper, a follow-up to the Discussion Paper 10/2 issued in March, was expected to be published this summer but the regulator has now pushed it back to the autumn owing to the glut of responses from operators. “This is to do with the complexity of feedback - this is quite an involved area,” says an FSA spokesperson. “Because of theses complexities, we want to ensure we have time to speak to all the industry people and that is why the paper will come out in the autumn.” The feedback follows a detailed questionnaire the FSA sent to platforms asking them to outline the costs of implementing proposals set out in the March discussion paper. Proposals include unbundling platform charges and scrapping rebates - measures hotly contested by the big four supermarkets who argue this will lead to increased costs and complexity for consumers. Speculation is rife the delay of the paper stems from intense lobbying undertaken by fund supermarkets to retain fund manager rebates. Fidelity head of UK fund partners Ed Dymott confirms the platform has been in regular contact with the FSA. “We have asked the FSA for clarity on the question of rebates,” he says. “We have been going through various questions with the FSA around pricing structures and rebates and we now eagerly await the final paper.” He adds the supermarket is committed to implementing an unbundled pricing structure “way before the RDR deadline” but says platforms should be able to operate a dual pricing model. A £10,000 ISA is on average 37 basis points more expensive through an unbundled platform than its bundled counterpart, claims Dymott. Whilst it seems the majority of the proposed changes in DP10/2 – including higher capital adequacy requirements, improved disclosures and re-registration – are set in stone, the FSA appears to be listening to the concerns of fund supermarkets regarding the controversial rebate ban and price unbundling. And for good reason. Reconfiguring supermarket business models to an unbundled pricing model amounts to an administrative nightmare never previously undertaken. Unbundling and the consequent need to introduce different share classes is also a costly exercise. “It seems rather harsh to give the supermarkets a restricted time-line to change their business models,” says Avalon director Harry Kerr. “They have invested millions in their systems and will now need to renegotiate contracts with fund manager groups and change their systems and literature.” Furthermore, Skandia, Cofunds and FundsNetwork hold around 80% of assets under management on all UK platforms. Upsetting these investment giants at the very time the Government is trying to establish a savings culture could prove counterintuitive. Some voices within the industry even speculate if supermarkets have to reconfigure pricing structures in line with adviser charging principles they could be forced to adopt entirely different business models. “Fund supermarkets will keep an eye on what advisers will be doing and if more are opting for restricted advice they might decide to just cater to these IFAs,” says Defaqto insight analyst for funds Fraser Donaldson. “They could also adopt a direct to consumer offering.” The paper’s delay means the supermarkets are unlikely to implement wholesale changes beforehand. Donaldson points to another fallout arising from FSA procrastination. “New platform players are unlikely to enter the market until final rules are in place. There are people out there waiting to enter the market but cannot do so before they know what positions are allowed or disallowed. They certainly do not want to spend a lot of money barking up the wrong tree.” Given the intense lobbying and vested interests at stake, it seems a distinct possibility the FSA will bend to supermarket demands and adopt some kind of compromise measure surrounding the thorny issue of rebates. “Perhaps the FSA will make a U-turn on rebates and say to supermarkets you can do it as long as it is totally transparent,” says Transact head of marketing Malcolm Murray. He adds the only way to ensure transparency in such a situation would be to force platforms to declare how much each rebate is and the amount paid to the client. “But this is not the answer – this is a compromise measure. The only answer is to ban them altogether.” Thorman agrees the regulator could opt for a compromise solution, but stresses disclosures must be made as clearly as possible. This option was set out in point two of the FSA’s proposed options in DP10/2. Here, the regulator proposes “continuing to allow platforms to be remunerated by product providers, but with additional regulatory safeguards in the form of rules or guidance on unacceptable practices and mandatory disclosure of remuneration to customers.” But any compromise solution involving disclosures runs the risk of opening up a whole new can of worms in terms of what form these disclosures will take. The arguments on both sides of the rebate divide are powerful and the FSA will have to carefully weigh up the options. On the one hand, scrapping rebates will cause a huge amount of upheaval to the giants dominating the market. On the other, the rebate issue strikes at the heart of the regulator’s drive to clean up the industry and forge a more transparent, open market. Thorman says should rebates continue to exist, the FSA’s adviser charging principles – a central plank of the RDR – will be completely undermined. With the proposed changes set out in DP10/2 very much encrusted into the fabric of the RDR, there is also an argument the time-line is out of sync. Whereas advisers have known about the RDR for years and have had plenty of time to prepare for it, platforms are having major changes thrust upon them just two-and-a-half years prior to the deadline. Law firm Herbert Smith notes in a recent briefing Platform regulation – an important fork in the road: “In view of the obvious connection between platforms and the RDR it would have been helpful if the FSA’s thinking on the regulation of platforms had developed at an earlier stage, ideally in tandem with RDR proposals.” “That said, considering these issues at a late stage is clearly preferable to not considering them at all.” Transact’s Murray thinks supermarkets have had ample time to prepare. “Fund supermarkets knew what the RDR was four years ago and they must have been aware their model was not going to suit – it has been on the cards since the first RDR paper.” Dymott acknowledges Fidelity has been gearing up to the changes for some time and says price unbundling is an inevitable part of market evolution. Plans to offer ETFs over the next 12 months – an addition requiring an unbundled charging structure – is testament to the platform’s forward-thinking, he says. Dymott says Fidelity’s concerns surrounding the discussion paper are less to do with the RDR and more the lack of clarity over what constitutes a platform. “We have lobbied hardest on getting a clearer definition of a platform – we really need clarity on this issue. The discussion paper was focussed around platforms and supermarkets but there are other providers and products out there. “To date, the FSA’s regulation has been activities-based. But when you look at the activities of platforms these can be similar to life companies, pension providers and fund managers. Will regulation cover all of these entities? If so, should the fees a fund manager pays to a third-party administrator be unbundled?” The FSA’s definition of a platform is admittedly rather loose. Its March paper described it as an “an entity that supplies platform services”. Herbert Smith’s briefing notes it is “hardly surprising” there is no standard definition of a platform given the rapid evolution of different business models and a “principles-based” approach to regulation. Fidelity also thinks platforms are being unfairly singled out for specialist regulatory scrutiny. Dymott points out the platform market only covers around 3-5% of the entire savings market. “A large part of the market will be out of the regulator’s scope and this is creating an unlevel playing field.” Partner at Herbert Smith Patrick Buckingham says: “Platforms have been identified as a potential solution to some of the practical difficulties arising from the application of adviser charging to fund products. “There has been a lot of pressure to come up with a commercially viable solution.” He adds platforms have also become far more visible in the internet age making it hard for the regulator to ignore them. As supermarkets anxiously await the final platform paper, advisers are meanwhile left in a quagmire of uncertainty. The FSA’s rather ambiguous stance on whether advisers should use a number of platforms to be independent further clouds the regulatory environment. Although the regulator said in DP10/2 it has “mixed views” on the issue, it appeared to lean towards multiple use when suggesting customers have different requirements best served by offering a number of platforms. But Transact’s Murray says the widely-held view the FSA is prescribing multiple platform use is a misconception. He says the regulator is simply asking advisers to fully explain their platform choice. “The FSA is telling advisers to justify why a client has been put on a wrap,” he says. “As an adviser, you need to make sure you have on file a record of why you chose a platform for a client.” Avalon’s Kerr says his platform is reaping the benefits from the FSA’s perceived push to multiple platform use. “The idea of not just using one wrap has actually created an interest in us,” he says. “Advisers are looking around thinking they need to segment their business and use different platforms and we have had quite a few IFAs get in touch with us as a result.” “Niche players like us start looking interesting for different client segment banks because we fit a different profile.” One area of concern for those smaller players, however, is the requirement for platforms to hold larger amounts of capital. In DP10/2, the FSA says new capital requirements will better protect consumers and limit the chances of platforms running into financial difficulties. Kerr thinks the requirements could reduce choice for the end client – thereby defeating a primary RDR objective. “This undoubtedly makes it harder for smaller, niche players and might restrict choice at the edges.” Whether smaller players will be pushed aside remains to be seen. And this holds true for all of the proposals enshrined in the March discussion paper – nobody knows the impact they will have until they come into effect. As such, it would seem to make sense for the FSA’s more controversial proposals – such as banning rebates – to be watered down and introduced gradually, in stages. This phased approach would enable the regulator to assess what impact the changes are having on the ground and allow for modification and tweaking before full roll-out. If the platform community is drifting into unchartered regulatory waters, advisers are set to be hit by a tidal wave of regulation over the coming few years. The RDR grabs much of the limelight, but IFAs will also have to get to grips with pension reform, auto-enrolment, UCITS IV and the introduction of key information documents. Advisers will need to tread carefully over the regulatory minefield. Published by IFAOnline
