Sententia Articles April 2019

In this Issue

Investment Platforms Market Study

Are consumers in a position to make informed decisions about their choice of platform? Do platforms compete to add value for consumers? These are some of the questions posed and answered by the FCA’s recent study. Read more here…

Triage: How to Navigate the Advice Boundary

With contingency charging still prevalent it’s understandable that some clients may wish to peer into a crystal ball for clues as to the likely outcome of advice, before committing to spend their hard earned cash. This article explores the FCA’s distinctions between advice and triage. Read more here…

Brexit Roundup

We give a summary of recent developments. Read the article.

   

FCA Investment Platforms Market Study

The FCA recently set out their views on whether consumers in the platform market are able to make informed decisions about their choice of platforms and the investments they choose on them. This study, The Investment Platforms Market Study Final Report, also looks at whether platform providers compete to add value to consumers. While the report covers both advised and non-advised platforms, here below we make some comments specifically relating to those that are advised.

We in the platform market were very pleased to read that overall the FCA found that the market is working well for consumers; it’s a view that we share and represents a big change from the era when life companies and commissions dominated the stage. We take this as a big endorsement as platforms have only been around in the UK since the turn of the millennium and in our view have transformed the market for the better for consumers. Another welcome comment from the FCA is that customers get access to greater features that reflect the more they pay. This resonates with Novia customers and advisers who take advantage of the additional tools and services provided to manage customers’ wealth.

Despite the endorsement referred to above, the FCA did make a few points of detail and we comment here on those more pertinent to Novia and our adviser customers. The FCA stated that it should be easier for investors and consumers to shop around, and that platforms should be able to compete by negotiating with fund managers to reduce prices. One of the most obvious barriers to switching platforms is exit charges and the FCA are holding further consultation on this, with feedback to be given by 14 June. We at Novia have always been against all exit charges and will be giving this feedback to the FCA. We believe that it is the customers’ money and they should be free to access and move it where they wish without penalty. Novia therefore supports the move to ban exit fees across the industry. The FCA recognises the customer benefit of investing through a platform, but customers’ wealth is still difficult to transfer out of many older products. The other issue affecting how easy it is to switch platforms is the existence of ‘superclean’ share classes that may exist on one platform but not the other. Novia is pleased to see the FCA recognise the solution we promote: that ceding providers should be required to convert a ‘superclean’ share class to a common share class to enable a re-registration to take place. The further consultation published by the FCA will consider how rule changes will make transfers simpler.

Another area of comment was on the topic of orphans. There are two points of interest here. The first is that the FCA are not insisting that platforms do not make an extra charge for orphans, which Novia does, but rather that platforms should be able to demonstrate that they are Treating Customers Fairly. We will be reviewing our stance on this but the principle is very clear; orphan customers are more expensive for us to administer, as you would expect in the absence of an adviser. The second point is concerning identification of orphans and who should be responsible for notifying platforms. The FCA have stated that this is the responsibility of advisers under the principle of Treating Customers Fairly, and is not a platform’s responsibility.

There was considerable comment in the FCA’s Interim Report concerning inducements and whether or not some services offered by platforms may act as incentives to adviser firms and lead to conflicts for advisers. In the end the report contained no new rules, only a reminder to platforms that they need to ensure that they comply with existing rules against inducements. This does not mean that the issue has gone away, but rather that it is still in the minds of the regulator and if the rules are not followed then action may be taken.

The report recognises that 'vertical integration may create a material risk of conflict of interest'1 but only reminded vertically integrated firms of their obligations to manage those conflicts. The FCA noted that since publishing the interim report there has been a decline in the number of platforms promoting in-house funds on Best Buy lists. Furthermore, while some respondents to the interim report suggested vertical integration might be creating barriers to entry and expansion, the FCA 'heard no further concrete evidence of harm'. 

So, vertical integration, provided the conflicts are managed, is A-Okay in the eyes of the regulator. We are updating our research at the moment on financial advisers running their own funds, and the trend seems to continue. The Platform Market Study certainly will not discourage mid to large size advice firms looking to run their own funds. However, there are some interesting observations regarding the costs and profitability of vertically integrated firms. Despite an expected higher profitability, vertically integrated firms were overall less profitable and costs per AUA were higher.

Finally, it is encouraging that the FCA appears to be allowing time for the platform market to innovate and address some of the regulator’s concerns. Novia will continue to work with our peer group to improve outcomes for consumers and lobby to create a level playing field. However, we must not lose sight of the expectation to deliver, otherwise the FCA will implement further rule changes when they take another look in 2020/21.

1MS17/1: Final Report

Top

Triage: How to Navigate the Advice Boundary

Advice costs money…and so it should. Good quality advice is key to a client’s retirement planning, but will they see it that way when faced with an upfront cost? With contingency charging still prevalent it’s understandable that some clients may wish to peer into a crystal ball for clues as to the likely outcome of the advice, before committing to spend.

Triage is, by definition, not advice. The risk you take when offering a triage service is that advice might be the unintended outcome. Regulated financial advice requires adherence to the prescribed processes and strict standards set out by the regulator. However, the line between guidance and advice has often seemed blurred.

In PS18/20 the FCA issued perimeter guidance in an attempt to clarify the boundary between triage and advice. The guidance was clear: any exploration of the client’s personal circumstances would be likely to breach the advice boundary.

We consider that any guidance based on a consideration of a customer’s circumstances which steers them one way or the other is likely to be advice on the merits of a transfer, and therefore pension transfer advice.

So if triage is not advice, what actually is it?

Guidance services, such as triage, should be educational and present a balanced view of the advantages and disadvantages of transferring.

In the policy statement the advice line was boldly drawn, and closer to the bone than people were perhaps expecting.

To illuminate the dark spots further we have pulled together a table of examples from the FCA’s policy statement of things that can and can’t be included in a triage service. 

Triage Advice
An explanation of the starting position for transfer advice (i.e. that the transfer is unsuitable until proven otherwise) A Transfer Value Comparator
'Balanced examples of circumstances where a transfer may be beneficial of harmful' An indication that, if advice were given, the firm would or would not recommend the transfer
'Factual information about safeguarded benefits and flexible benefits' An indication that that the client should or should not  take advice
Features of these benefits 'that make them more or less suitable for general groups of people' Describing any of the benefits in a non-balanced way (e.g. it's more favourable to flexibly access)

 

Given the complexities involved, advisers may decide that triage is best outsourced. The FCA are happy with this approach so long as appropriate due diligence is performed on the triage service provider, and clear records are kept of what information a client has received.

Top

  

Brexit Roundup

Keeping pace with Brexit over the last few weeks has been increasingly challenging as the tapestry is forever changing. Nevertheless, this is where we are:

The Second vote

On 12 March we saw Theresa May bring her withdrawal agreement to the House of Commons for the second time. Having failed at her first attempt on 15 January by a whopping 230 votes, many were not confident that she would win the second vote. This second attempt to pass the withdrawal agreement was indeed defeated, by a smaller yet significant margin of 149 votes. The DUP did not support the vote, saying that “sufficient progress has not been achieved at this time”. This was a big defeat for May, the fourth largest defeat of the government in the history of the Commons, and it left the fate of the country still hanging in the balance.

Can we have an extension?

With the second vote having been rejected, May had to return to Brussels to ask for an extension with less than 10 days to go before we were scheduled to leave the EU altogether, deal or no deal. The 27 EU leaders came back with two offers: the first, an extension until 22 May (when EU elections are due to start) if MPs were to vote for the withdrawal agreement in the Commons by 29 March; and the second, a shorter extension until 12 April.

John Bercow speaks up

On 18 March the Speaker of the House of Commons, John Bercow, surprised everyone by laying down the law and confirming that the government could not hold a third vote on its proposed Brexit deal without showing a “demonstrable change” in the agreement. The ruling took MPs by surprise, but Bercow carefully reminded them that parliamentary conventions dating to the seventeenth century detailed how the government could not hold repeated votes on a motion that is “the same in substance”.

How did we have a third vote?

Theresa May knew that Bercow’s “substantial change” could not be negotiated with the EU in the time frame provided and therefore needed a loophole to establish a third vote. The government was able to achieve this by separating the withdrawal agreement from the political declaration. Although not a substantial change in the actual content of the agreement, it was enough to meet the requirements laid out by the Speaker. It would however mean that a further vote would be required on the political declaration.

The third vote

With the whole country and world watching, the government held its third and critical vote on the withdrawal agreement on Friday 29 March (the day we were originally scheduled to leave the EU). In a twist, Theresa May had promised on the previous Wednesday that she would resign as Prime Minister if her Conservative colleagues followed through and voted for the withdrawal agreement. This was a huge turn, and many wondered whether a number of rebellious Conservative MPs would vote in favour of the agreement if it meant May would resign. As it happened this was not the case; the withdrawal agreement was once again defeated 344 to 286, a much smaller margin of 58 votes. The diminished margin was however irrelevant as it did not change the outcome and meant that by the originally scheduled departure date the United Kingdom was still without a deal.

The Final Four

On Monday 1 April MPs voted on four ‘indicative votes’. Indicative votes are not legally binding but rather meant to give an indication as to what might capture a majority. There were four proposed indicative votes, each representing an alternative approach to Brexit and a different motion. The four motions were: Customs Union, Common Market 2.0, Public Vote and Parliamentary Supremacy. All four motions were unsuccessful in achieving a majority, and were therefore defeated. The one which came closest to a majority was the Customs Union proposal with 276 against and 273 for. The Common Market 2.0 and Public Vote were both defeated by less than 25 votes. Regardless of the close margins, it still leaves the UK adrift without a deal.

A ‘no deal’ law?

On 3 April MPs voted on whether to pass a bill preventing a no deal Brexit. Such a bill would insist that the Prime Minister ask the EU for an extension to Article 50 beyond 12 April. The vote was the only one in recent weeks to reach a majority, albeit by a margin of one, with 313 For and 312 against. The bill however cannot in itself guarantee a deal; it only stipulates that the Prime Minister again returns to Brussels to avoid such a scenario. From previous visits we know that the EU is unlikely to agree to a long extension without a demonstration of agreement in the government, or a public vote.

A plea for a further extension

On Wednesday 10 April, two days before the UK was scheduled (for a second time) to leave the EU, Theresa May and her EU colleagues returned to Brussels for a further EU Summit. May had planned to ask for a short extension until the 30 June, but the other representatives were not supportive of this idea and believed if there were to be an extension it should be longer to allow the process to be properly completed. After a long evening of discussions, we heard at 2am Thursday 11 April that Theresa May and the EU had agreed an extension until 31 October.

So where does this leave us?

There is still a possibility that the UK will leave the EU without a deal either before or on 31 October 2019. One of the requirements of the extension is that there can be no further negotiations on the withdrawal agreement. Furthermore, the UK must hold the elections to the European Parliament and if it fails to do this then the UK will leave the EU on 1 June.

The FCA published its Final Rules for Brexit on 29 March, which can be found here. Whilst we do not anticipate any major changes to our business or services, we will continue to keep you updated via our website and our Novia Update emails, which can be found here.

 

 Top