Having spent years sticking it to the banks, City regulators have shifted their sights to other areas of the financial services sector in recent times, with fund managers in particular feeling the hot breath of the Financial Conduct Authority on their necks this year.
Barely had the ink dried on June’s damning report on the charging and performance of large parts of the asset management sector, when the FCA announced a new investigation, this time into the investment platform market. It wants to know whether the burgeoning platform sector is delivering robust price competition for investors – and whether vested interests need tackling.
Now, you might argue that the platform sector has less to worry about than its asset manager counterparts. It was certainly notable, as the Financial Times pointed out on the day the probe was announced, that the share price of the UK’s largest platform, Hargreaves Lansdown, actually rose slightly. By contrast, when Vanguard, the US passive fund giant, announced its launch in the UK earlier this year, Hargreaves Lansdown’s share price slipped by more than 8 per cent.
That reaction suggests price competition – the issue with which the FCA is most concerned – is actually working well in the platform market right now. If a disruptive new entrant – albeit one with Vanguard’s huge scale – has the power to cause such panic, we can hardly characterise the sector as a cartel.
Nevertheless, fund marketers would be wrong to write off the FCA’s platform investigation as having little significance for their activities and operations in the years ahead. The regulator has already indicated that it is especially concerned about the issue of vertical integration, where platforms are operated by fund management companies selling their own funds as well as those of competitors; that has the potential to distort competition, the FCA warns. So too do the commercial relationships between platforms, asset managers, discretionary fund managers and advisers, the regulator adds.
Such worries are likely to translate into attention to a number of areas – and could eventually see fund marketers constrained by new regulation.
Fund research is a good example. The FCA has previously said it is worried that funds awarded especially high ratings by fund ratings agencies do not appear to be delivering substantially better performance for investors. It also frets that there is an incentive for the ratings agencies to hand the best marks to more expensive funds, since these are more likely to have the resources to pay the agencies for using their work in their own marketing material.
Another issue for some fund groups to ponder is that the terms of reference of the FCA’s investment platform probe are drawn very widely. The regulator will consider not just pure platforms but any provider that offers an online portal through which investors can access the funds market. This will include a number of fund management firms that offer investors an open architecture as part of their online offering.
Then there are questions such as how funds are getting into the model portfolios or preferred provider lists that many platforms now offer their clients, and who holds the balance of power in price negotiations. Again, the FCA is concerned that investors may not be getting all the benefits that should accrue from competition between platform providers.
Given that funds under management on platforms had grown from £108bn in 2008 to £592bn by the end of last year, these are issues that fund marketers should now be thinking about very carefully – any negative determination by the FCA clearly has the potential to pose a material risk to asset management firms caught up in the crossfire.
Not that this is to suggest the FCA’s investigation will necessarily deliver the same sort of damning verdict seen in its asset management review. The platform market, which barely existed a decade ago, has developed rapidly and in parallel to investors’ own willingness to make decisions online; in that context, the scope for misalignment of interests may not have been so wide.
Nevertheless, fund marketers should be on their guard. Having seen their businesses attacked directly by the regulator this year, the platform inquiry could easily develop into a second front on which they will have to engage.