Written by Kevin Okell on Tuesday 28 January 2014
As long ago as 2007 in DP07/02 the FSA recognised the increasingly significant role platforms would play in retail financial services and even then viewed them as a double-edged sword for their RDR objectives. On the one hand they offered a ready-made mechanism to support adviser charging and offer open access to investments from a wide range of providers; on the other hand they presented a risk of consumers becoming locked into expensive products due to obstructive barriers to exit.
The FSA decided to deal with the lock-in threat by forcing platforms to let customers transfer their assets in-specie, i.e. without the costs associated with selling and re-buying. After a great deal of debate, detailed analysis and open standards development under the auspices of TISA, we are finally seeing the results of this policy decision with a dramatic growth in the number of inter-platform transfers over the past 6 months.
It all sounds like a great success for free market economics and principles-based regulation but I wonder if there’s a cloud on the horizon. Several platforms have reported that over half of their new flows are going into model portfolios and it’s a trend that seems set to continue as distributors look to capture a bigger slice of the cake and justify ongoing fees. Platforms are increasingly using their model portfolio capabilities as a differentiator and, like all good differentiators, the best ones are hard to replicate by your competitors.
That’s a healthy driver of innovation in a market economy but, in this case, it may also end up undermining the FCA’s goal of free movement of assets between platforms. Whilst it may be possible to recreate a given portfolio on another platform and to re-register the underlying holdings swiftly and efficiently, this would be of limited use to an adviser if the new platform can’t actually run that model on an ongoing basis. They could obviously suggest to the client that they should move to a new model which is supported but that starts to sound disruptive and defeats at least some of the objective of free movement of assets between platforms.
Maybe this is just another unintended consequence of market innovation (in much the same way that RDR has created its own set of side-effects). Or maybe it’s platforms looking to create a new kind of ‘stickiness’ for their business – in which case I suspect the regulator may take a keen interest!