This guide is subject to UK law and was last updated on 5th May 2010.
A platform is an online service that allows financial advisers to manage their clients' investment portfolios. Some platforms can be used by customers directly.
In its most basic form, a platform aggregates data from several sources to provide a consolidated view of the client's total investments.
Many platforms, however, also provide facilities for investments to be selected, bought and sold. Some platform operators use their platform to sell their own products as well as those of other providers. Products on offer commonly include ISAs (Individual Savings Accounts) and SIPPs (Self Invested Personal Pensions), life insurance products and a wide range of collective investment schemes.
In addition, platforms can offer a range of investment profiling and planning tools, including tools for analysing clients' attitude to risk and for allocating assets between different asset classes. Some platforms provide model investment portfolios for different types of client, or a guided architecture service, which allows access to a limited number of funds rather than the whole of the market.
Wraps and fund supermarkets
The terms "wrap" and "platform" used to be more or less interchangeable, but as the market has developed, a wrap is usually understood to refer to a type of platform offering access to a wide range of investments.
Wraps receive remuneration from product providers and also charge a separate fee for their services which is paid directly from the customer's cash account on the platform. Rebates from product providers are sometimes credited to the customer's cash account and used to pay the wrap platform fee and any fees the customer has agreed to pay their financial adviser.
The term "fund supermarket" generally refers to a platform that offers a narrower range of products than a wrap, although this may not always be the case. Fund supermarkets are generally paid commission by fund managers and other product providers and do not make an explicit charge to the customer.
Virtual or shallow wraps merely aggregate data from several sources to provide a single valuation of a customer’s assets.
A corporate wrap or platform is a slightly different concept. It is a means by which an employer can offer HR benefits to its employees. The employer provides a link from its intranet to an adviser or product provider which offers wrap products and services in the workplace and permits easy payment of premiums by way of payroll deductions.
A wrapper (or product wrapper) is not an investment in its own right. It is a product used to hold cash and investments, such as an investment bond. The wrapper appears as an account on the platform, where its performance can be monitored and its components varied.
A tax wrapper (or tax-free wrapper) is a tax-favoured savings account used to hold cash and investments as above. Examples would be ISAs, SIPPs or child trust funds (CTFs).
The platform market is growing. According to a Money Management survey published in February 2010, about half of all new retail fund investment business is placed through platforms, which now administer around £110 billion in assets.
Money Management estimates that four big fund supermarkets – Cofunds, Fidelity Funds Network, Skandia Investment Solutions and Hargreaves Lansdown – together hold about 85% of the assets currently administered by platforms.
The Financial Services Authority (FSA) anticipates more advisers will adopt platforms as they prepare to comply with the new regime introduced by the Retail Distribution Review (RDR).
Platforms themselves are not regulated as designated investments. But when operated or used, they generally involve one or more regulated activities, such as dealing as an agent, arranging investment deals, safeguarding and administering assets and sending dematerialised instructions.
Firms carrying out such activities by way of business must be authorised by the FSA. Platform operators are also subject to prudential requirements including capital adequacy standards.
Until now, however, the regulation of platforms has been principles-based, with very few rules applying specifically to platforms or those that use them.
The FSA is now reviewing this approach in light of the RDR and other issues it has identified during its thematic review work and from the experience it has gained in regulating the platform sector (see: The RDR and platforms). A consultation paper is due to be published in the summer and a policy statement by the end of the year.
In the meantime, the FSA has been investigating the quality of advice given when financial advisers use platforms and platform-based financial planning tools and whether they have adequate systems and controls to support that advice.
The results of the exercise were mixed, with examples of poor practice in all key risk areas. Two firms have been required to undertake past business reviews as a result and may have to make redress payments to their clients. Another has been referred to the enforcement and financial crime division for further investigation.
Many adviser firms are currently making the transition from providing purely transactional advice to offering ongoing portfolio advice services and using platforms to do so.
But none of the transitional firms included in the FSA's thematic review had specifically considered their risk management and oversight procedures in light of their changing business model. As a result, firms were failing to recognise what platforms were suitable, monitor their platform-based advice and ongoing services, or identify and manage any conflicts of interest that might arise.
Weaknesses in firms' systems and controls also meant firms were not carrying out adequate due diligence to make sure the platform they selected was (and remained) appropriate.
The FSA says it does not expect firms to review the whole platform market for each individual client. Rather than adopting a "one size fits all" approach, however, it suggests firms segment their client base and consider which platforms would be appropriate for different client types.
Whether or not a platform operator allows assets to be transferred (or re-registered) to another platform without the client having to sell and re-purchase their investment is another issue firms should take into account when selecting a suitable platform, as well as the charges the platform will make for this service.
The FSA allows platforms to charge a reasonable amount for manual re-registration and the industry is working towards an automated solution. In its March 2010 discussion paper, the FSA says it is minded to make it compulsory by the end of 2012 for all platforms to allow re-registration.
Firms remain responsible for providing the client with advice that is suitable to the client's needs even when using financial planning tools provided by a platform, such as risk profiling or asset allocation tools.
The FSA recommends firms view such tools as a basis for discussion rather than as a definitive assessment, as they may still need to tailor their advice to the individual client. In fact, most firms included in the review were doing this already.
Similarly, model portfolios should not be used by default for all clients within the model's risk profile as they may need to be adapted to the client's particular needs and circumstances.
Recommending a model portfolio in all cases is unlikely to meet the rules on independence, which currently require that firms recommend products from the whole of the market. The question of independence and the use of platforms is considered further in the FSA's March 2010 discussion paper.
Switching investments on to or between platforms is another area where firms are not always providing suitable advice. The FSA expects the firm to be able to show there is a clear benefit to the client, particularly if any loss of benefits or additional cost is involved.
Another important issue is cost. The FSA's thematic review found too many firms were failing to take into account the overall cost to the client of the platform, the product and their own advice.
A platform that charges a fixed annual administration fee, for instance, may be suitable for a client with a lot to invest but may be less so for the smaller investor. Is it in the client's best interest to receive a full portfolio advice service with all the additional costs and ongoing adviser charges that would entail? Or would the client be better served by a simpler, lower-cost alternative?
The FSA also identified a lack of transparency over the way platforms are remunerated and the charges customers have to pay. Some platforms were disclosing charges so poorly that customers were unlikely to understand their amount or effect.
A particular issue is that of product rebates, where a portion of the product cost is refunded into the client's cash account on the platform and may then be used towards paying platform fees and other charges.
In its March 2010 discussion paper, the FSA says it would like to end all payments from product providers to platforms, ban product rebates and "unbundle" platform charges so clients know exactly what they are paying for and can compare different platforms. In the meantime, the regulator is actively encouraging platforms to improve their standards of disclosure.
The results of the thematic review have been collated into a good and poor practice report. The regulator has also published templates for suitability and disclosure assessments, all of which are available on the thematic review page on the FSA website.
A consultation paper on the future regulation of platforms will be published in the summer, followed by a policy statement by the end of 2010.
"In light of the risk to customers and unacceptable practices identified, platforms advice will form a supervisory priority in the future," the FSA warns in its March 2010 discussion paper. "And where we find unsuitable advice and weak systems and controls we will take tough regulatory action".
Contact: Bruno Geiringer (firstname.lastname@example.org / 020 7418 7306)