The City watchdog has begun an investigation into the fast-growing £600 billion investment platform industry amid concerns that investors may not be getting the best value for money and that big providers could be keeping out competition from cheaper rivals.
The Financial Conduct Authority said that it would examine the business models of Hargreaves Lansdown, Cofunds and others as it looked at whether they were delivering on their promise to use their market power to give customers a better deal on access to investment products.
Banks, insurers, fund managers and independent providers with investment platforms will be part of the FCA’s market study, which aims to report back by next summer.
From managing assets worth £108 billion less than ten years ago, investment platforms, whether through advised sales or via independent providers not tied to a particular fund or institution, managed £592 billion of clients’ money by the end of last year. Nearly 80 per cent of retail investments are made through platform providers. In particular, model portfolios, which allow consumers to construct a selection of investments determined by what level of risk they want to take, have become increasingly popular.
Christopher Woolard, executive director of strategy and competition at the FCA, said that he wanted to ensure that consumers were being served properly. “Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice,” he said.
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Verona Smith, head of platform at Seven Investment Management, praised the FCA’s decision to go ahead with a deeper study of investment platforms. “It’s important to look under the bonnet and assess how effective the technology is and how that can be harnessed to help to achieve a positive customer experience,” she said.
Hargreaves Lansdown, the largest independent fund platform, said that the FCA’s study was “very broad” and defended the way in which financial products were sold. Tom McPhail, head of policy at Hargreaves Lansdown, said: “This study recognises the vital service platforms now provide to millions of people, helping them to save and invest for their future.
“The advice gap remains and platforms have an important role to play in delivering guidance and support to investors, many of whom need help if they are to invest with confidence.
“Platforms can also bring pressure to bear on asset management costs, negotiating discounts for investors, promoting good funds and highlighting poor performers.”
Tobin Ashby, from the insurance team at Pinsent Masons, the law firm, said: “It is unlikely that the FCA will expect to go through the process without some action at the end of it and so platform providers will need to be braced for some challenges.”
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Despite concerns about the potential for new rules, shares in leading platform providers were barely affected. Hargreaves Lansdown’s stock fell in early trading, before closing 10p up at £12.89.
Behind the story
The clock has been ticking for some time
With an operating profit margin of 66.8 per cent, it was only a matter of time before regulators decided to take a closer look at Britain’s investment platform industry (Harry Wilson writes). Together, providers that include Hargreaves Lansdown, Barclays Stockbrokers, TD Direct and Cofunds have cornered the retail investment market to the extent that they manage 68 per cent of the money that ordinary savers put into investment funds.
Hargreaves, for example, has lifted assets under administration from more than £20 billion to more than £60 billion in only five years. Such growth has raised questions about whether economies of scale that have been be generated have been translated into real savings for customers, as well as concerns about the potential for a few large players to drive out competition.
The FCA will look at the fees imposed to access the platforms, as well as individual products, by comparing the cost of funds from the providers. The suspicion will be that some platforms are not passing on all the savings to customers that they could and that the cost to access a fund might vary markedly, depending on whether the client uses an intermediary or deals directly.
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After the recent FCA study of the asset management industry, the providers are likely to face calls for change next summer when the final report is published.