Word on the web: Investment market intervention

The FCA has highlighted a number of areas for improvement in the investment sphere
by Rosalie Starling

A crackdown on the UK investment market is imminent, according to the FCA’s recently published mission and business plan for 2017–2018, which include a review of individual financial services sectors. As part of the new strategy, the industry watchdog will investigate whether competition is working efficiently between online brokers, or investment platforms. According to Money Observer’s Kyle Caldwell, potential competition issues to be reviewed include “how online brokers charge consumers, and whether they have the incentives and ability to put competitive pressure on asset management charges”. 

This investigation into investment platforms will draw on findings from the FCA’s current Asset management market study, says Caldwell. The study’s interim report, released in November 2016, highlighted some examples of “poor practice when platforms process switches”. The fact that retail investors do not benefit from economies of scale by combining their money through direct-to-consumer platforms, as well as the imposition of “unreasonable post-sale barriers on customers when they change product, switch provider, submit a claim or make a complaint”, were also flagged as problems, he says, citing the report. 

To address competition, the FCA has proposed a number of solutions, including an all-in-one fund charge and a requirement for asset management firms to provide an approximation of implicit and explicit transaction costs that are not included in the annual charges quoted by fund management groups. Furthermore, it has suggested “various remedies for asset managers to enable them to move direct investors from 'expensive to better-value share classes'”, says Caldwell. These include highlighting the difference between old and new share classes, and communicating with direct investors instead of a broker or platform as a “means of finding out whether they would like to switch into the cheaper share class”.

Money Observer article
The right adviceFinancial advice in relation to retail investments is also coming under fire. According to the FCA, consumers may not be getting value for money when accessing retail investments through professional guidance, as “relatively few advisers are transparent about their pricing before they sell advice”, writes FT Adviser’s Katherine Denham. “This does not incentivise advisers to compete on price and may result in limited pressure on them to reduce their charges,” says Denham, quoting the FCA. The lack of consistent and suitable investment advice could be due to “conflicts of interest or insufficient competence”, according to the regulator. 
The watchdog is concerned that the downward selling spiral resulting from investors escaping a failing asset management business will have a major effect As part of its review, the FCA also highlighted limited comparability and ineffective disclosure for self-directed investors, as well as commission for protection intermediaries being a common element of remuneration, which could provide motivation for mis-selling. 

However, the adviser community has labelled these claims somewhat harsh. Denham quotes Alan Steel, director of West Lothian-based Alan Steel Asset Management, who emphasises that professionals must make all charges to potential clients clear before any business is conducted; and Matthew Harris, independent financial adviser (IFA) and owner of Dalbeath Financial Planning, who says: “In the real world, it can be quite difficult to know what fee will be payable until a full assessment of the case has been carried out.” However, Harris further notes that a full fee agreement should be approved by the client before proceeding. “It is never right for an IFA to complete a service without getting specific approval of all the fees in advance,” he says. 

FT Adviser article
The threat of failure Finally, the FCA will focus on the failure of a large asset manager, and its possible impact on market stability. The watchdog is concerned that the downward selling spiral resulting from investors escaping a failing asset management business will have a major effect. However, according to Portfolio Adviser’s Louise Hill, some industry professionals say this risk has been “overplayed”.

The focus on making improvements is commendable, says Lee Robertson, chief executive of Investment Quorum, who is quoted by Hill, but such concern regarding failure is surprising: “In one breath they are talking about asset managers having high profit margins and in the other they talking about market stability if they fail. Of course anything where a firm fails would be bad, but I think they might be overplaying the risk of that happening.”

The review of the investment management sector over the coming years will also include “overpayment for investment services” and “the creation of products to suit managers and advisers rather than end-investors”, says Hill. The behaviour of custody banks is also a key focus area. Contracts between custody banks and investment managers appear to be “more beneficial to the banks”, while ten-year contracts make it “difficult for managers to switch providers”. The FCA will ensure custody banks upgrade to more advanced technology systems to mitigate the high prudential and operational risks associated with a significant service outage within the sector.

While the FCA’s measures may be severe in some instances, they will ensure greater clarity for firms and consumers moving forward. 

Portfolio Adviser article
Seen a blog, news story or discussion online that you think might interest CISI members? Email rosalie.starling@wardour.co.uk.
Published: 21 Apr 2017
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