In this piece about platform selection suitability, Mike Barrett takes a look at the pieces of regulation and prompts to advisers the FCA has issued over the past five years
The idea that advice firms should put client needs first when selecting platforms isn't exactly radical. It's common sense. But it is also a regulatory requirement. Over more than five years, the FCA (Financial Conduct Authority) has produced a variety of studies, papers and factsheets repeating the need for advisers to make sure services are in the best interest of the client.
While many advisers will already have been meeting the standards required by the regulator, evidencing compliance to the FCA's satisfaction is becoming more important than ever. I thought it would be useful to look back at the various pieces of adviser regulation and its cumulative impact on platform panel selection today.
In early 2014, the FCA's ‘Supervising retail investment advice: delivering independent advice' (TR14/5), fired its first warning shot to firms falling short on platform due diligence. It pointed to a common failing of firms was in "adopting a single platform and not carrying out sufficient research and due diligence on the other options available…".
It followed up in 2016, raising concerns via its thematic review Assessing suitability: Research and due diligence of products and services (TR16/1) about the standard of platform research and due diligence. It was particularly worried about firms not challenging their "inappropriate bias towards providers", by basically sticking with the status quo, and advisers placing the level of service they received ahead of the level of service received by clients.
The regulator's Platforms: using fund supermarkets and wraps factsheet (12) aimed to help advice firms understand what to consider when adopting and using platforms. These included provider financial standing, costs and charges, disclosure, asset classes, funds and tax wrappers, accessibility, functionality, tools, terms and conditions and support services. It added that it should be "rare, if possible at all, that a firm could use one platform for all clients and meet the independence rule".
In the Investment Platforms Market Study (IPMS), the FCA noted that advice firms generally select their platforms in stages, with the initial due diligence stage forming the basis of the shortlist or panel that advisers choose from. It also emphasised that firms should consider factors including their business model, the services they want to offer - which might differ between clients - and their typical target market and approach to segmentation.
The Product Intervention and Product Governance Sourcebook (PROD) includes requirements on investment houses to be clear about the target market for each of their products and states that advisers must "assess the compatibility of the financial instruments with the needs of the clients to whom it distributes investment services, taking into account the manufacturer's identified target market of end clients…".
The rules seem to have had the greatest impact on panel creation and platform selection. Our latest State of the Adviser Nation research found that 13% of advisers switched platforms and nearly a third (31%) directed new flows to other platforms in 2019. Of these, more than a third (34%) of advisers in each case were prompted to act as a direct result of PROD.
In particular, PROD has brought client segmentation to the front of adviser's minds. Although the rules don't mandate segmentation, without dividing their client base, it is more difficult to demonstrate how a firm is focusing on individual client needs and meeting those needs when it comes to platform selection.
It is certainly the way most advisers are addressing the regulation, with our State of the Adviser Nation research finding that PROD had changed or influenced 55% how advisers segment their client base.
It's two years since PROD came out, but the FCA is clearly still looking at compliance, given its Dear CEO letter in January. It told advisers to make sure services are appropriate, value for money and in the best interest of the client; basically reiterating the PROD rules. Between PROD and various FCA papers, there's no room for doubt that platform panels must be created in line with the firm's client proposition.
Mike Barrett is consulting director at the lang cat
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