Watchdogs are to probe whether DIY investing platforms offer value for money to the vast army of savers who use them to buy funds, shares and other products.
Platform charges and whether firms use their bargaining power to get investors a good deal, and the model portfolios sold to people wanting simple off-the-shelf products, will be under the spotlight.
‘The Financial Conduct Authority will explore whether platforms help investors make good investment decisions and whether their investment solutions offer investors value for money,’ said the City regulator.
Moving online: Savers have flocked to DIY platforms to buy and sell investments after advisers were forced to start charging upfront for their services
The new probe was announced last month alongside the FCA’s review of the fund management industry, which called for firms to start publishing a ‘single, all-in-fee’ including transaction costs so investors can see exactly what they are paying.
Today, FCA executive director of strategy and competition Christopher Woolard, said: ‘With the increasing use of platforms, and the issues raised by our previous work, we want to assess whether competition between platforms is working in the interest of consumers.
‘Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice.’
The FCA said that platforms interact with other platforms, financial advisers, fund managers and fund ratings providers, and it wanted to find out whether these relationships work in the interests of investors.
DIY investing platforms held some £592billion of investors’ money in 2016, compared with £108billion in 2008. Other business like banks, insurers and wealth managers also operate online portals and hold a further £100billion.
Investors have flocked to DIY platforms to carry out their investing business after a huge overhaul of the finance industry banned backdoor commission payments from providers to advisers in 2013.
Advisers had to stop using commission as a way of customers paying for their time and charge upfront for their services instead. The investors who baulked at their fees, or found themselves priced out if they didn’t have huge sums to invest, have found it easier and cheaper to go online.
The FCA’s probe will focus on five broad areas:
* Barriers to entry and expansion: Do large platforms benefit from economies of scale which smaller firms and new entrants struggle to match?
* Commercial relationships: Are platforms willing to negotiate a competitive price on investment charges, do commercial relationships drive investment choices, and what are the implications for investors?
* Business models and platform profitability: Do the drivers of profitability affect firm incentives and the factors over which they compete, and if so how does it affect investors?
* The impact of financial adviser platforms: Do these compete in the interests of the end investor, and are any benefits passed through to investors?
* Customer preferences and behaviour: Do platforms enable consumers and advisers to assess and choose services and products that offer value for money, and do new challengers struggle to compete as customers face barriers to switching?
The FCA is asking for feedback by 8 September, and plans to publish an interim report on its findings by summer 2018.
How big are the top DIY investing platforms?
Rise of DIY platforms: How much investor money in billions of pounds did top firms hold in 2016 compared with 2008? (Source: FCA)
What does the investment industry say?
Tom McPhail, head of policy at market leading investment platform Hargreaves Lansdown, said: ‘The FCA has set a very broad scope for this study; the terms of what constitutes a platform can include online portals, life insurance companies, wealth managers and banks; in effect any organisation providing a retail investment service is likely to come under scrutiny.
‘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.
‘As with the asset management study, this paper is not simply about the price charged by retail investment service providers, it is about the value they deliver to investors.’