OUR PROFESSION

CONSULTATION RESPONSES

 

 

Our Profession

Consultation Responses

AIFA response to Discussion Paper 07/2 Platforms:

the role of wraps and fund supermarkets

 

Introduction

AIFA is the trade association that represents UK regulated independent financial advisers (IFAs).  Membership of AIFA is voluntary and on a corporate basis.  AIFA currently represents over 70% of IFA firms in the UK.

IFA firms are the leading distribution channel for retail financial products in the UK, generating over 65% in monetary value in 2006 and are the major sector advising and arranging private pensions in the UK.  As such, IFAs represent a dominant force in the maintenance of a competitive and dynamic retail financial services market.  

The adoption of platforms by adviser firms therefore creates the potential to change the way that the majority of retail financial products are distributed in the UK.  We support FSA’s response to this change in the market place and share its concern that consumer protection and TCF remain the overarching considerations at this particular stage in their development. 

 

Executive Summary

Financial Adviser firms have been quick to appreciate the benefits both to their businesses and clients offered by platforms, wraps and fund supermarkets.  Wraps have been widely utilised in Australia and North America for some time, and this has enabled developers in the UK to build a generation of platforms that look comparatively advanced. 

The adoption of platforms by advisory businesses acts as a catalyst for re-engineering the firm and moving it toward a recurring income model.  Whilst a “wrap based business model” is not the only way for this change to occur, it is perceived as the most widespread.  The adoption of this model has occurred relatively quickly in the last two years (moving from the “innovator” stage through to a position akin to “early majority” in market penetration terms). 

AIFA has been supportive of this move as this business model builds value in IFA firms, more easily fosters a culture of on-going service, and thus makes for more sustainable businesses.  In response to feedback we have run a national series of “moving to fees” workshops for member firms and provided other information and help.

It is important to note that, whilst this business model is currently favoured by a growing number of firms, it is not the only one that provides for long-term value creation in IFA business.  It is certainly not the only one that provides the foundation for on-going advice, and we do not suggest that it is the “right” business model for all IFA firms.  The business model adopted by firms will be decided by the principals of the firm in recognition of what their existing clients wish – and how they, as business leaders, wish to develop their firm.

We would also comment that we firmly believe wraps and associated developments are simply technology and administration services – not products and so do not fit within the packaged product regime.  We explore this point in detail below.

 

Assessment tools

 

We are also aware that risk assessment tools provided by a platform could direct an adviser towards certain asset classes and funds based on a standardised question bank.  The onus, of course, remains with the adviser to know their client and assess their attitude to risk in the first place, without reference to such tools (if the risk profile generated by the platform differs from the adviser’s professional opinion, he or she can decide just how appropriate such a tool is). 

The danger is that platforms may be relied upon by others to judge the quality of the IFA’s advice; such faith not always being warranted.  These tools should be considered as a helpful function – not a replacement for an adviser’s judgment.  This is an essential consideration given any regulatory or Financial Ombudsman Service decision in the future. 

Further, it is our view that the platform must act as ‘servant’ rather than ‘master’ and we are advised that concern has been expressed by some users that some platforms are designing their own client management systems (CMS) and that this is not always desirable.  Many IFAs have their own CMS in place, such as 1st Software, Plum Software etc., which allows them to control the flow of information to their clients and they do not wish to see this control interfered with by their platform provider. 

 

Continuing professional development

 

The ease with which client funds can be allocated on-line also challenges advisers to check their own understanding of increasingly innovative products.  Very complex and comparatively untested investments such as 130/30 funds, Funds of Alternative Investment Funds, etc are encroaching on the UK retail market and advisers need to recognise that the level of knowledge required by benchmark exams may not be sufficient to advise competently.  Firms adopting wraps or platforms will ensure that employees’ Continuing Professional Development (CPD) covers advances in both technology and product development as appropriate.  We will be making this point to members.

We have looked at this DP in its context as one of the suite of papers forming the review of retail distribution, and believe that the increasing use of platforms will assist in achieving the long term aims of the regulator for the UK economy (better informed clients, increased value of firms etc) which we share.  We also believe that their presence in the retail market will sit comfortably with principles based regulation.  Transparency throughout the value chain, universal terminology and compliance with TCF principles should be the aims of both providers and intermediaries. 

 

Answers to specific questions

 

Chapter 2 - Analysing the platform market

 

Q1: Do you believe that it would be desirable to have consistent

terms for platforms with different characteristics? If so, how

do you believe this could be achieved?

Yes.  Consistent terminology would be helpful but we would not wish to see FSA prescribe the terms around characteristics or features of the offering as this is an evolving market. 

Our main desire is for the different platform characteristics, their functionality and any costs to be transparent and comparable so that intermediaries can select the right platform(s) for their client base and business model. 

There is a need to establish a “common language” for the market.  We are concerned that the current ambiguous language could add to consumer confusion.  For instance, there is a continued debate around the language of “open” or “guided” architecture IT systems.  Whilst one supports whole of market access, the other does not, but is often presented as giving a “better than best” offering.  Such terminology does little but deliberately obscure the true meaning of the offering presented. 

Whilst we understand that the market is fast-moving and dynamic, and we would not seek to put any impediment to the market’s development, we do feel that the current multiplicity of terms is unhelpful and risks being another case of the industry over-complicating a consumer proposition with the resulting detriment of all.

To this end, we would like to establish a working party, facilitated by FSA, of representatives from AIFA, ABI and IMA in order to set out some guidelines and establish common terminology.  If done at a “principles of clarity” level, it should not interfere with innovation.

Chapter 3 - Applying regulation to providers and users of platforms

 

Q2: Do you believe a principles-based approach to platforms, without detailed rules or guidance, is appropriate?

This is in keeping with the general move towards More Principles Based Regulation so is appropriate.

It is difficult for any regulatory regime to keep pace and issue detailed rules and guidance in such an innovative sector of the market.  However, there must be some underpinning to ensure that consumers are protected.  

The key aspect is: clarity of proposition.  It is essential that where entities have a role which affects the consumer, that their position (and influence) is understood.  FSA’s work on Provider / Distributor responsibilities is most helpful in this respect, especially the comments by Sarah Wilson in underlining the fact that it is not the labels entities adopt, but the role they play, which determines their responsibilities.  We will comment further on this in a response to the additional chapter.

 

Q3: Do you believe that our Handbook makes it difficult for platform providers and intermediaries to focus on platforms as services, leaving behind traditional ‘packaged’ product structures? If so, how would you recommend we change our requirements?

There is no evidence that this is the case.  Advisers appear to understand the nature of a wrap service and be able to differentiate between this and the traditional product structure (qv our comments on clarity above).

A key challenge for FSA will be in the disclosure requirements now facing firms.  With the IDD and Menu passing into guidance, we are keen to work with FSA to ensure a level playing field is maintained and that consumers are clear about the service and associated costs irrespective of which avenue they explore for access to financial services. 

Disclosure must be clear and transparent throughout the value chain – the platform proposition, advisers’ charging structures, and costs applicable to packaged products.

From our experience, member firms are adapting well to the requirements of advising on the options made available through adoption of platforms.  Firms need to understand and address any CPD challenge this poses.

Chapter 4 - Adopting platforms

 

Q4: To what extent (if any) can the adoption of platforms support a move away from up-front commission? Are there differences between fund supermarkets and wraps in this respect?

The case study shows that the adoption of platforms can indeed support a move away from up-front commission but the method of payment is of less importance than the transparency of the service and costs.  Some firms may choose to take commission initially with the intention of moving to fees in due course as the wrap proposition becomes more familiar to them and their clients recognise the added value.   This is a sign of good business-transition planning.

We would add that the DP’s recognition that there is scope for the cost of advice, as well as other parts of the value chain, to be clouded via platforms is apposite and welcome.  However, the reference to fees, however they are structured, avoiding ‘the potential distortions created by intermediaries being offered commission that varies by product type and provider’ ignores the potential for fees to be manipulated to the detriment of the consumer.  For example, the charging of an hourly rate only represents good value if the work is efficient and can be evidenced through use of timesheets or other audit trail, whereas the payment of commission provides an incentive for work to be completed accurately as quickly as possible.  Whilst a move away from up-front commission facilitated by a wrap-based business model is welcome, it must be stressed that it may not necessarily be the best model for all firms and their clients, or viewed as the ideal option.  A move to Customer Agreed Remuneration, as proposed under the RDR, may provide a useful transition.

Further, we believe that FSA should not act as an economic regulator, neither commenting on fee levels nor proposing remuneration structures.  The Office of Fair Trading (OFT) is taking a more vigorous line in such matters and we have a concern of dual regulation in these matters.

 

Q5: Do you believe our approach to regulation should change at all, to assist firms that may want to use platforms to change their business models? If so, how?

The current approach to regulation is proportionate and in keeping with MPBR. 

A potential area for FSA to review is that of disclosure, to ensure there is transparency of all relevant information for consumers and the roles and responsibilities of those firms in the value chain are clearly defined.

 

Q6: Do you agree that an intermediary’s choice of which platforms to use should be driven by the types of customer it will serve and the nature of the service it wants to offer?

There are a series of linked decisions any firm will need to take in deciding whether to adopt a platform.  The first is a “business planning” set of decisions.  These include: the future strategy of the business, how well this aligns to the firm’s core competencies, the profile of its clients (and employees), resource constraints (and options for transition funding), and any migration plan. 

The second decision relates to the individual needs of the firms existing clients, how they intend to segment customers and the TCF implications of this.

There is a clear distinction to be made between existing clients and those who will be new to a firm.  In establishing a new proposition, a firm will have the right, as set out in the case study, to be selective about the clients it wishes to deal with, and those who it cannot help.  This is a more straightforward decision than with a firm’s existing client base.

 

Q7: Do you believe that the information firms need to undertake ‘due diligence’ of platforms could be made more accessible?

AIFA has published a Viewpoint on wraps that sets out the pros and cons of providing a wrap service and includes some advice on what to look for in a provider. The information provided by FSA is also proving useful to intermediaries.  We will believe it is extremely important that firms review the market carefully before selecting a platform, and then to keep their choice under regularly review. 

As the market has developed since our Viewpoint was published, we plan to issue a good practice note on how firms could select a platform provider as further guidance. 

Good firms are already exercising excellent due diligence. Bankhall is a good example as evidenced by their thoroughly researched selection of Capita.   After informal discussions with a number of firms, Bankhall asked 22 to submit formal tenders. From the comprehensive information gathered, it invited 7 firms to present their proposition before making their final selection.

Chapter 5 - Platform use in practice

 

Q8: Do you agree that it is important that firms assess whether platforms are suitable for individual customers? In practice, how might this be achieved?

Yes.  As stated previously, there are a series of linked decisions any firm will need to take if deciding if to adopt a platform.  Once the decision has been made and a provider selected, the next set of decisions regards the individual needs of the firm’s existing clients.  The case study offers an insight into this matter.  The number or proportion of a firm’s client base that would benefit from being uploaded onto a platform is a decision to be made by that firm in conjunction with each client. The adviser should be able to explain clearly why the platform is being used for the client, including the benefits and costs.  Equally, if a client is not offered the service or where it is only for part of their assets, the reasons should be clearly evidenced. Principle 9 refers to customers being entitled to rely upon a firm’s judgment.  In our view, the responsibility for assessing the suitability of platforms for individual customers, and indeed for addressing any dichotomy surrounding new versus old customers, rests in this principle. 

 

Q9: Do you agree with our position on ongoing services and remuneration (see paragraphs 5.10 to 5.14)?

On the whole, we agree.  It is essential that there is transparency throughout the value chain and that in the wrap world – it is easy to muddy the charges. 

 

Q10: We require firms to explain the overall costs of products and services to the customer, including the cost of services delivered through platforms. How do you think this is best achieved?

The costs case study is a good example of how this might be achieved.  We particularly liked the fact that clients can view fees and charges both in percentage and cash terms for themselves. 

Firms will consider and decide for themselves how best to explain the cost of platform services, in line with the MiFID disclosure requirements and Principle 6 (TCF). Examples of what is considered to be ‘good practice’ would be helpful to firms and we look forward to discussing with FSA further guidance on this matter. 

Costs will be one of the considerations taken into account by a firm when deciding which clients would benefit from wrap services.  Unless clients can see the benefits from the costs they are incurring, they will be reluctant to pay for the services.  Explanation of the costs is therefore not just a regulatory obligation but part of good business sense and retaining client loyalty. 

The IDD and Menu have been the prescribed vehicle for ensuring transparency of adviser service and remuneration but their future application is under question.  The use of platforms must be accompanied by a regulatory commitment to ensure transparency of charges in a comparable way.  We would support the use of the Total Expense Ratio (TER) coupled with disclosure of any preliminary (and on going) charges.

 

Q11: Do you feel there are conflicts of interest between a firm and its advisers that need to be managed and if so, what are they?

The managing conflicts of interest case study shows that there is the potential for such situations to arise.  Such conflicts, however, can be managed through firms’ TCF procedures.  Under the current disclosure requirements, firms and their advisers are required to disclose any beneficial ownership, the products and services they offer, and appropriate costs. This should continue in the future.

Chapter 6 - Giving independent advice when using platforms

 

Q12: Are there regulatory or practical problems with any of the ways of providing whole of market advice we have described? Are there other ways of delivering whole of market advice when using platforms?

In order to be ‘independent’, an adviser must be allowed to recommend from the whole of the market.  In a platform environment, this means using ‘open architecture’ systems that allow access to all available products and funds as opposed to the ‘walled garden’ or guided architecture model. 

 

Q13: Do you believe that platform providers can or should be encouraged to offer access to more universally suitable products that could then be considered purely as ‘wrappers’?

What characteristics do you think pensions and life products would need to be considered as ‘wrappers’?

We do not believe that it is the role of a regulator to intervene in the evolution of the commercial services or products offered by platform provider. The range and features offered will drive competition and it will be for advisers to help shape these developments as they will want services and products that meet the needs of their clients. The market will therefore decide which ‘products’ are offered by platform providers.

We do not believe that advisers should necessarily have to compare traditional packaged products with the wrap proposition as it is not just the wrapper and underlying investment, but the service provided by the platform that needs to be considered.  Different characteristics of ‘wrappers’ will emerge as the market develops, which will make comparisons difficult. Our main concern is to ensure that disclosure is robust. 

We would also like to add that we strongly believe that there is no such thing as a ‘universally suitable product’.  Our response to DP 07/1 (RDR) will address our concerns regarding the notion that ‘any product is better than no product’ that might be perceived when reading the proposals for, in particular, primary advice.  IFAs do not make recommendations to clients without conducting an initial fact find and assessment of their client’s personal circumstances and it is not always appropriate for a product to be recommended at all.  We trust that the latter point, which often marks the difference between an IFA and a tied salesman, is recognised.

 

Q14: Do you believe we need to take account of advisers’ use of platforms in considering any changes to the conditions for adviser independence? If so, why?

No. We believe the existing guidance issued by FSA is adequate. Independence should not be affected by the use of a platform or wrap service provided there is the ability to recommend from the whole of the market, which must remain the defining characteristic of an independent financial adviser.

Chapter 7 - Roles and responsibilities of platform providers

Q15: Do you believe that platform providers should take steps to make sure that – where possible – a customer can remove their assets from a platform without having to encash them?

Most definitely yes.  This is one of the current barriers to the expansion of wraps as without this facility, advisers and clients may be reluctant to use them. Any regulatory support to remove obstacles in this area would be welcome and in the best interest of consumers. We understand, however, that there are plans to facilitate ‘in specie’ transfers between platforms following an agreement between the leading technology providers*.   It is planned that such transfers will be possible from early 2008 and the issue of re-registration will need to be discussed fully during the consultation period. AIFA will be keen to participate in the debate.

 

Q16: Do you agree with our analysis in the table in Annex 1 of different situations in which ‘in specie’ transfer could be facilitated?

Yes.

Chapter 8 - Incentives, charges and information

 

Q17: Do you believe our requirements on inducements and commission disclosure are appropriate and relevant for platform providers and users?

Yes.

 

Q18: Do you believe that disclosure of platform remuneration across MiFID and non-MiFID business will be - or should be – equivalent?

It should be equivalent. Anything else will create confusion for consumers as they will have no real understanding of the difference.

 

Q19: What are the particular risks of consumer detriment arising from any lack of standardisation and transparency in platforms’ disclosure practices?

The lack of a standardised approach to disclosure means that consumers will find it difficult to make direct comparisons of services and costs and could therefore end up paying more for a service from one firm than another. But in practice, few consumers seeking this type of advice and professional service are ever likely to ‘shop around’ even if direct comparisons were available. FSA put far too much emphasis on the desirability and inclination of individuals to seek out the cheapest, rather than the best. Transparency is paramount if consumer detriment is to be avoided.

 

Q20: Do you believe we have correctly identified the key issues in charges disclosure?

Yes.  We support the FSA’s desire to ensure consumers are clear about the services they getting and the charges incurred.  The FSA needs to bear in mind, however, two additional factors when considering the adequacy of requirements relating to disclosure.  The first is the capacity of investors to understand information if there is too much of it or if it is complex.  The second factor is that changes in disclosure systems can trigger a number of costs for firms (systems, product literature, training), and the benefits of a change need to be clearly evidenced.  We are happy to work on these matters with FSA to meet the regulator’s objective whilst minimising costs to firms.

 

* Bravura, Multi Funds Technology, which facilitates FundsNetwork and IFDS, which is behind Cofunds, have agreed to use the trading standard of ISO20022 which will allow advisers to switch clients from one platform to another without having to encash investments, avoiding potential CGT liabilities and the cost of reinvesting the cash. Citywire, 3rd September 2007).

 

AIFA

26 October 2007

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