This week the FSA published its long awaited consultation paper on the regulation of the platform market. The full report can be downloaded below and we offer a summary of our thoughts also:

Key Points

Adviser charging will come from a platform cash account and be agreed by the adviser and their client – no provider or platform influence. No surprises there. Moving to platform usage, very welcome clarification provided I think on this age-old question about whether advisers can use just one platform. P13 and 14 of the paper details this and it’s well worth a read, IFAs. The Mackay in a nutshell take on this is yes you can, but bear in mind that some clients won’t need to go on a platform at all and also there will be some clients at the small or larger end of client account size (or some who have high transaction levels, for example) where your principal platform doesn’t cut the mustard when it comes to costs. So adopt a principal platform sure, but use your loaf and don’t make lazy assumptions. In other news, re-reg will be here and compulsory by 2012. About time – that’s a positive.

Now moving to payments and charges. Non-advised business (ie Hargreaves et al) will be able to continue to live by rebate but they will have to disclose their rebate deals. That will make for some uncomfortable fund managers. It’s quite an advantage for these platforms – assuming they keep a 150bps retail share class and continue to pocket the 50bps “adviser fee”- although it could over the mid-term put the downward pressure on fees that the FSA want to see.

The best thing I think that the FSA confirmed is that they will ask the platforms to deliver a consistent fee disclosure document. Hallelujah, what a good idea. At the moment it is impossible to do this manually with little hidden bits and pieces all over the place. This is a fabulously positive step and I think the FSA really do need to be prescriptive here to ensure a common and fair playing field for all. On rebates, the supermarket models will continue to take a fee from the fund managers – the FSA has specified that this is for administrative services provided, trying to remove the ‘shelf space’ element or guided architecture bias. So put simply, that’s a model of let’s say 1.00% AMC (although some will probably try it on) with no adviser commission and an assumed 25bps starting point for a payment to the platform. There is no reason why platforms shouldn’t use bargaining power based on size and I think bundled pricing is good news for clients with smaller balances. It usually is always cheaper as the bundled providers have more up their sleeves to play with. And don’t forget that in the future we will all know what is up their sleeves.

This scenario does not preclude the supermarkets from expanding their offering to include investments with no fund manager payments, and charging a fee to administer these assets, and I think independent advisers will need to use platforms which facilitate this. (A little area I don’t fully understand is whether the FSA expect to see greater consistency of fees from asset managers to platforms – could one argue that the cost of providing administration services is broadly consistent across all platforms of a certain scale?) Even with the ongoing bundled option, if the supermarkets want to carry on with their stated intent to develop into broader platform services for bigger, more complex clients, they will need to adopt an unbundled structure too as they can’t pitch effectively for bigger clients with what is effectively a flat charging model. I don’t see this changes the need for these guys to deliver unbundled pricing solutions to market.

The sticking point for me in the whole document is the statement that those wrap providers with an explicit fee structure (ie charging a platform fee and rebating any fund manager payments as cash to the client) will need to change this. No cash payment can be made to the clients and we’re either looking at unbundled platforms using institutional share classes only or fiddling around crediting units back to client accounts. Unit rebates feel really ugly. I think the problem here is not individual IFAs who use wraps but big groups who white-label these platforms and how they position the fees and costs. There are some groups out there who market their white-labelled platforms with the idea that the fund discounts negotiated will enable advisers to charge a greater trail fee. This makes me think that the FSA’s issue is not with the wraps, but with some of the groups who are white-labelling them and how some of these guys are positioning things. I don’t know that – it’s a hopefully educated guess – and I think we could usefully have some discussions about what’s really concerning the FSA here and whether these concerns can be mitigated in any other way.

It feels a bit like the little guys may have been a touch complacent about jumping on the Jubilee line and setting out their case to the FSA – the supermarkets certainly wore out those tracks and they had the resource to lobby hard. But rewind to the whole point of this exercise, which is clarity for the consumer and all of the newer platforms have been broadly built to these principles. Especially in an environment where we will have a welcome and prescriptive disclosure document, I really don’t see why we need to nobble the smaller wraps and force a clunky system on them. If it ain’t broke, don’t fix it?? Upping the stakes for a number of the smaller wraps are upcoming capital raisings or flotations – they don’t want anything to threaten projected revenue and they could do without big chunky system upgrade costs. The ink’s not yet dry on this topic and I think it needs to play out more.

Last little point. Making platforms send out voting rights etc to customers? Expensive paper battle that I don’t see the benefit of for advised clients – surely an “opt-in” scenario which required the provision of an email address for electronic dispatch could make sense? I can’t be alone in chucking these envelopes straight into the bin?

Let us know your thoughts by adding a comment below.