The Financial Conduct Authority (FCA) has singled out fund discounts, as it fired a warning shot at platforms over managing conflicts of interest in their best buy lists.
In a Dear CEO letter, sent out on 6 February 2020, FCA director of supervision for life insurance and financial advice Debbie Gupta said buy lists must be constructed impartially.
She criticised platforms with a “preference for funds offering discounts over formal and objective criteria, lack of independence of research teams and associated governance”.
Hargreaves Lansdown famously uses its Wealth 50 buy list to negotiate fund fee discounts, and Neil Woodford slashed his fees by a third for clients using the D2C platform.
Gupta said conflicts that were not managed could lead to investors receiving unsuitable products and services, and/or poor value for money.
The Woodford aftermath
She added that the processes for selection, monitoring and deselection of funds on such lists should be “documented, understood and followed”.
Altus senior consultant Rory Gravatt said the letter was “spot on”.
He added: “When fund flows are surging to a particular fund, or funds, it becomes very challenging to miss out on the commercial opportunity because your criteria says no. Yet stand the line you must.”
The Woodford suspension highlighted how important the monitoring piece in particular is, he said.
“Woodford did show signs to those with the right monitoring processes, and would have failed others’ waiting period criteria but, for those who fell foul, it is demonstrating that processes have adapted to handle such problems that is important.”
SMCR, Brexit and the platform market study
Beyond buy lists, the FCA letter touched on topics ranging from the senior managers and certification regime (SMCR) to Brexit.
On SMCR, which it noted had been extended to solo-regulated firms on 9 December 2019, the regulator highlighted that accountability for outsourced functions sit within the platform business.
On Brexit, the FCA reminded platforms that they need to understand how the end of the implementation period on 1 January 2021 would affect customers, and action needed to be taken.
Additionally, the watchdog highlighted the final investment platforms market study report published in March 2019.
In particular, platforms’ responsibilities on transfers, best execution and Mifidi II charges disclosure.
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