Response to FCA CP19/12 Consultation on Investment Platforms Market Study Remedies

In a joint response from UKSA and ShareSoc on behalf of individual investors, to the FCA CP19/12 Consultation on Investment Platforms Market Study Remedies, we said:

As noted in para 1.6 of CP19/12, the consultation paper will also be of interest to representative industry bodies and consumer groups.  Individual consumers may also find it of interest, and their feedback is welcome.We represent “consumers[1]”, although we prefer the term ‘investors’.

To inform our response, ShareSoc undertook a survey of our members in April-May 2019 on their use of investment platforms. Over 550 responses were received (over 11% response rate), with each commenting on use of up to three platforms. This showed clearly the detriment to individual investors from the current situation. We have included key conclusions from the survey in our responses below. We believe that the proposed revisions are a sound attempt to make it easier to transfer funds from one platform to another, where a number of platforms have made it very difficult to do so. Below we make seven key points:

1. We disagree with the conclusion in para 2.3 of your consultation that “the market is working well”[2].FCA comment in Chapter 6, on page 47: in the 2019 FCA Retail Investments Sector View (Chapter 6) “The main concerns in this sector continue to be unsuitable products and services, high charges, and low quality products and services. These could have knock-on effects for confidence and participation.”  The https://www.fca.org.uk/publication/market-studies/ms17-1-2.pdf Investment Platforms Market Study Interim Report was published in July 2018, after the very good and very critical 2016 Asset Management Market Study Interim Report https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf. We also note on the FCA website the comment “Since publishing our interim report, we have seen firms and the industry acting to improve the provision of information about costs and charges, helping consumers shop around. As a result, we are not proposing new rules but will review the progress of industry in 2020/21, and consider if further action is necessary.” We think this indicates the FCA is very concerned about the way the market is working. In addition, we are concerned that the market is not working well in enabling individual investors to vote their shares. We discuss this further under point 6 below. In summary, we do not think the market is working well.
2. We therefore welcome para 2.4 that it should be easier for consumers to shop around and to transfer their assets more easily. We agree that there is a detriment to individual investors from the current situation and as the champion of individual investors, we welcome measures to address this. ShareSoc research has found that a significant minority of our members would be charged over £1,000 by their current platform provider to move their portfolio. However, the key outcome that needs to be sought from these proposals is to improve competition and hence drive down overall costs and improve services for investors. Enabling switching should be seen as primarily a means to this end.
3. It is important that the proposals are implemented ASAP. The platform providers must not be allowed to drag their heels on this. Then there must be a rapid assessment of the impact on competition, so that, if these measures do not achieve these longer term aims, a more robust regulatory response can be put in place.
4. We think also that direct measures to address our concerns about unsuitable products and services, high charges, and low quality products and servicesshould be implemented in parallel with these proposals. We note that ongoing costs and fund performance can be of far more significance than costs and difficulties of transferring funds.
5. Another key problem is the appallingly low level of financial education in the UK. For example, financial knowledge is much higher in the USA and it is in our view no coincidence that fund fees and charges are lower in the USA than in the UK. The financial education problem will take a long time to solve. Given the lack of education, it is unrealistic to expect the wider problems to be fixed by competition following implementation of these measures to make transfers easier and so you need to move on to tougher rules on services and overall costs, etc ASAP.
6. If the market was working properly it is likely that we would by now have seen platforms competing to offer better functionality to investors. This might include allowing investors to receive information from the companies in which they have invested and to vote their shares easily at the AGM. Individual investors have been disenfranchised by the nominee system. Lack of competition between platforms has reinforced disenfranchisement. Some platforms make it very difficult to vote one’s shares. Many make it very difficult to transfer one’s shares to a platform offering better services to customers/investors. Platforms have been given great power and have been able to dictate how competition operates in the marketplace. This needs to be reversed. Hence, we very much welcome the reference to The Law Commission Review of Intermediated Securities (in para 4.13 on page 17 of the FCA/FRC DP19/1). The Law Commission Review must be given high priority. This could lead to improvements in the nominee system and enable all retail investors to exercise their role as stewards of the companies in which they invest. Retail investors own, on average, 29% of AIM companies and 12% of main market companies. They are an important contributor to investor stewardship but are currently widely prevented from exercising that role.
7. We note the small level of costs shown in para 36 of Annex 2. We agree that the benefits, including the benefits of improved competition in this marketplace are considerable, as has been identified in the FCA interim report on the asset management industry published in 2016. Your cost benefit analysis clearly demonstrates that these proposals should be implemented without delay.

[1]We acknowledge your use of consumer in its economics sense, but highlight the more usual colloquial use in the UK today as a consumer is one who does consume, i.e.  to destroy or expend by use; use up.to eat or drink up; devour. to destroy, as by decomposition or burning: Fire consumed the forest.to spend (money, time, etc.) wastefully. See https://www.dictionary.com/browse/consume. Hence, we prefer the term ‘investor’ which better reflects investors’ goals of sustainable growth in their investments, whereas consumer may convey images of destroy or expend by use, etc.

[2]Para 2.3 says: Overall, we found that the market is working well in many respects, for both advised and non- advised consumers. Consumers who pay more typically get access to a greater range of non- price features and they are, overall, satisfied with their platform. Platforms also appear to help consumers and financial advisers make informed investment decisions free of investment product bias. This suggests that platforms are competing in the interests of most consumers.

The full response is here FCA-Consultation-on-Investment-Platforms-Market-Study-remedies-Final-June-2019

The consultation document is here https://fca.org.uk/publication/consultation/cp19-12.pdf

Cliff Weight, ShareSoc Director