Written by Ben Hammond on Wednesday 3 June 2015
I have said previously that platforms will need to think hard about how they can remain transparent and charge effectively without watching customers disappear in their droves. After all, up until recently, a majority of customers will not have understood how they were paying for a platform’s services and possibly thought of them as ‘free’. So, whilst the platforms’ project and compliance teams might be pulling out all the stops to ensure they remain compliant with the FCA’s PS13/1 regulations come April 2016 (“Sunset”), those who are responsible for balancing the books will be trying to work out how they can ensure the money will keep coming in and not necessarily just from the end investor.
Under the new rules, there’s a fair few things platforms are allowed to charge fund managers for and perhaps a few things which whilst not specifically listed, may still count (social events such as golf days are certainly frowned upon these days, but that’s a whole ‘nother story). One of the first concerns when the FCA made their announcement was, would anyone actually try and do this? Negotiations for these payments will need to be carried out which will be time consuming for both parties and has the potential to damage existing relationships. The regulator seems to think it’s of interest, with Hargreaves being one of the few who have said they will charge fund groups for carrying out work on behalf of a fund manager, however they certainly have more influence than some. In general, there are mixed views across the platform industry and so I think charging of this type is unlikely to be widespread. But it will happen and it’s worth reflecting on what form this might take and the possible consequences.
Corporate actions could have a big effect on price here: could the fact a fund manager can potentially be charged explicitly for the administration effort undertaken by a platform in carrying out the action mean that there are less of them in the first place? The same goes for pricing errors and the like – accuracy will be key.
Limited MI provision to fund managers is often talked about, however the nominee structure platforms operate under effectively hides the underlying customer from the fund manager, so making many details unavailable without extra effort. A platform will be able to rightfully charge a fund manager for the MI they would like to receive, however the costs could be quite substantial if systems need updating and permissions potentially obtained from clients. I can’t see this being a very popular option, if it ever actually comes to fruition, as most fund managers aren’t fussed about the small, non-institutional investor who they will be unable to market to directly in any case.
Advertising is the most controversial potential revenue source, mainly due to the fact that some will see this as just another way for a platform to channel business to a particular fund manager (this being themselves in some cases) in return for what could be seen as a kick back. Influencing distribution in any way has been criticised by the regulator and platforms alike, however many have relied on this income in the past. The FCA has been very clear on the fact that cross-subsidisation is not allowed and they will be keeping a close eye on things.
So how can the industry make sure the rules aren’t interpreted in such a way that they could be taken advantage of? If a platform wants to try and take payment from a fund manager, they will have to be 100% confident it falls within the rules as well as not affecting their overall business model. I know that many platform MDs will be discussing this and other such dilemmas between themselves regularly and so may end up running a ‘gentlemen’s’ rules’ approach when it comes to agreeing what is and isn’t considered suitable. Meanwhile, advisers will be keeping a close eye on the platforms they use and performing regular due diligence, as they always should of course. At least one asset manager has said they would load any platform charges into the cost of running the fund, meaning higher costs for the customer as a result of something they will get no value from.
There have been suggestions that platforms should start charging advisers rather than clients as the advisers are the ones who can end up dictating how a platform will develop and run their solution and therefore how much the customer ends up getting charged. Could this be seen as a potential alternative source of income in conjunction with charging fund managers?