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FCA raises concerns on platform switching and client best interests

16 July 2018

The FCA has raised concerns over the difficulty clients face switching investment platforms in it latest market study report. 

While the regulator said the platform market appears to be working well in many respects, with customer satisfaction high, it was concerned that consumers who would benefit from switching platform could find it difficult to do so.

In its Investment Platforms Market Study, the FCA found that 7% of consumers have tried to switch at some point, but failed due to the time involved, the complexity of the process and the exit fees. It stated that barriers to switching were “significant” and could reduce competitive pressure on platforms to offer good value.

The Regulator said it was “not concerned” about the rate of switching per se, “what matters is the ability to switch – consumers should have the option even if they choose not to use it”.

Verona Smith, head of intermediary, Seven Investment Management, said: “The industry has to make it easier for people to switch between platforms. At a time when it has become so much easier for consumers to switch bank account, the platform industry has moved forward over the years but we are still not there yet. It’s time these barriers were removed.”

Steven Cameron, pensions director, Aegon, echoed the sentiment: “It’s important that individual customers, whether or not advised, don’t face undue barriers if wishing to switch between platforms and we’re pleased the FCA is awaiting improvements which should emerge from the Transfers and Re-registration Industry Group before considering if any further remedies are needed here.”

The FCA also expressed concern for price-sensitive consumers, who can find it difficult to shop around and choose a lower-cost platform. Nearly 2 in 5 non-advised consumers (39%) chose a platform based on cost. However, awareness of platform charges was found to be low, with 29% of consumers either not knowing whether they pay charges for investing via a platform or thinking they do not pay any. The FCA said there was scope for improvement.

Andy bell, chief executive at AJ Bell, said the regulator was “absolutely right” to place value for money at the heart of its review of the market, with even small differences in price having a huge impact over the long-term.

He said: “While platform choice is influenced by a number of factors, cost remains a clear driver of value for money for both advisers and direct customers. We will continue to work with the regulator to ensure information on costs and charges is displayed as clearly as possible without adding to the hideously complex disclosure regime already in place.”

Bell also welcomed the FCA’s focus on providing advisers with clarity around suitability requirements regarding platform switches.

“This is a problem we have raised repeatedly with the regulator, with advisers often put off transferring clients on a bulk basis because of the suitability burden it creates. This is acting as a barrier to switching and risks creating poor outcomes for end investors,” he added.

The FCA review also highlighted concerns around orphan clients, who face higher charges and lower service. There are currently just over 40,000 orphan clients with in excess of £10bn of assets on platforms and the figure is rising.

Justin Urquhart Stewart, co-founder and head of development, 7IM, said: “If investors are paying for a service, they need to be able to make full use of it. That’s why we write to orphan clients, explain the situation to them, and give them the opportunity to transfer out of our platform without charge. We also have a self invest service for those who choose to stay.”

However, Ian Sayers, chief executive, Association of Investment Companies, said that while the FCA’s latest report raised important issues, it hoped the FCA would not miss the opportunity to look at how platforms promote competition in a broader sense.

He commented: “Looking at competition between asset managers is fine, but competition between different types of investment product is also vital for a healthy market. Investment companies can provide better long-term performance, with the average investment company returning 165% over the past ten years, compared to 108% for the average open-ended fund.

“But recent research from the lang cat has shown that platforms can form a barrier to the use of investment companies, particularly in the adviser market, where platform pricing structures can make it less cost-effective to hold listed funds.”

Those wishing to respond to the report have up until 21 September to submit their comments.