Out-Law Analysis | 17 Nov 2016 | 12:08 pm | 4 min. read
We discussed some of the pressing issues with representatives of the insurance and wealth management industry
Potential impact of FAMR
Not everyone agrees on the results of 2012's Retail Distribution Review (RDR), but it is clear that its impact continues to affect customers and the industry. The FAMR report did not itself create change, but may yet become a framework for important developments in the industry.
Some of the biggest potential impacts are:
Continuing impact of the pension freedoms
The new model of retirement is bringing platforms more into play, with many platforms experiencing or expecting increased levels of investments. However, there is still no clear solution for the 'middle' group of retirees with relatively small pension pots, who probably have the most to gain from any introduction of more streamlined advice models as a result of FAMR.
There is a feeling that the role of and opportunities around inter-generational transfer of wealth and multi-generational accounts is underdeveloped, and can be developed more now that the pension tax rules have changed. Focusing on the possibilities in this area could bring potential benefits for both customers and the industry.
The new 'lifetime ISA'
The lifetime ISA (LISA), due for introduction next year, is generally seen as a product that could work well on a platform - albeit a potentially unhelpful complication to the otherwise simple ISA regime.
Some view LISAs as the tip of an iceberg that might sink the 'ship' of pensions once and for all. Whether or not this was ever the intention behind the policy, a change of leadership in government may yet alter the course of developments. However, even before the new government was appointed there was a body of opinion predicting that the product may simply never get going, due principally to the age and investment limitations and the LISA's crossover with the help-to-buy ISA.
A pensions dashboard
The proposed 'dashboard' for pensions information is just the start of what needs to become a much wider-ranging and adopted method of providing customers with the information that they need to be able to make sensible financial decisions. There are questions over whether the plans can work at all, but the general view seems to be that it is better to start with something than to leave it in the "too complicated" box. Perhaps a full dashboard for all investments and savings will be more appropriate in time.
There are links between possible dashboards and new approaches to handing data, such as customer ownership and sharing only by customer choice. These concepts align well with the work being done on potential digital passports, or the UK's open data in banking initiative, for example.
Much more clarity is needed before the pensions dashboard can be taken forward; particularly in relation to the level of information being provided and whether, importantly, charges information can be included. The level of take-up by providers will be crucial to how useful the dashboard approach will be for consumers.
The expectations of the Financial Conduct Authority (FCA) that fund managers obtain sufficient information on the distribution of their funds even though, when using the platform model, the identity of the investors is usually unknown to the fund managers looks likely to introduce new elements into the relationship between fund managers and distribution platforms.
There are concerns about unhelpful disruption due to system changes that may be required to provide the necessary information and over how the target market can be properly monitored with the wide range of funds available. Some think that these requirements may be another factor that will contribute to a restriction on the funds that may be made available on platforms.
Recent developments and rumours of consolidation have fuelled discussion on whether the door is now open to further consolidation. Reduced valuations in response to the 'price wars' are seen as a factor that has opened up the market.
Now that the 'sunset' period on rebate payments has expired and ways have been found to move customers to new share classes in bulk, there is more understanding in the industry of how migration of customers can be achieved and the risks of doing so. This may lead to more confidence in attempting the migrations that are likely to be necessary following an acquisition.
Other considerations which will need to be overcome if the platforms market is to consolidate much further will be: business disruption; brand loyalty; technology mis-matches; questions over real economies of scale; and deal costs.
The Brexit process is still only in its very early stages, and so predicting its impact requires a considerable degree of speculation. As the negotiations play out over the coming years, platforms will need to keep a close eye on the following in particular:
While any restrictions on the EU market might be more of an issue in relation to the direction of future strategy than on current business for many platforms, the continued possibility of resulting market volatility could have an impact on the value of assets under administration (AUA) and inflows.
We have considered particular Brexit issues affecting insurers and wealth managers in a separate article. We will continue to consider the impact on platforms, fund managers, insurers and other financial services businesses involved in online investment.