Culture can ensure compliance is part of 'day to day business activity', says platform provider

Out-Law News | 24 Mar 2014 | 5:06 pm | 3 min. read

Focusing business activity around delivering the best customer outcomes and not treating regulatory compliance as a "bolt on" task will help platform providers adhere to new rules which are due to take effect next month, an industry insider has said.

Last week the Financial Conduct Authority (FCA) confirmed that it will proactively engage with businesses in the financial sector to assess their culture and other aspects of the way they operate with the aim if identifying "emerging risks" and work with businesses to ensure they "take pre-emptive action where necessary". The regulator's comments were contained in new documents it has published which outline its approach to supervising the UK's financial services industry.

Garry Mcluckie, communications director at wrap platform provider Nucleus, told Out-Law.com that some businesses in the platforms market are committed to "old models and old school thinking" and that they may face potential challenges in future because of the way they operate.

"If your culture is centred on developing better outcomes for customers then compliance is part of day to day business activity and not just about ticking compliance boxes," Mcluckie said. "You end up doing what is necessary – the whole compliance aspect of it just becomes natural business and common sense. It should never be a bolt on."

Mcluckie said that the Retail Distribution Review (RDR) conformed to Nucleus' and other wrap platforms' "way of thinking" but that fund supermarkets may need to undergo a change in culture before they can fully adapt to the changes in regulation.

"Some of the legacy providers are trying to use scale to introduce preferential price share classes," Mcluckie said. "Total cost to the client is what is important not whether you shave a few basis points off the price of funds. There is no point in claiming to offer super-clean share classes if your platform price is more expensive than the norm. They may be operating within the rules, but they are focusing on the wrong thing."

Fund supermarkets that have preferentially priced funds may encounter future challenges around the re-registration of customer assets under the new regime, Mcluckie said.

"Being able to move from one platform to another where there is a difference in the price can be problematic," he said. "It puts the onus on the seeding firm to make sure that the other platform can transfer the assets across effectively. It is their problem to ensure that they pass those assets across in the normally priced way. [Preferential pricing] starts to introduce complexity where there need not be any."

Re-registration is a term used to describe the transferring of customer assets from one platform to another without the customer having to sell and re-purchase their investment. Since the end of 2012, platforms have been obliged to permit re-registration of customer assets.

Recently, Nick Poyntz-Wright, director of long terms savings and pensions at the FCA said that platforms were not responding quickly enough to re-registrations. He also said the regulator was monitoring the effect of exit charges some platforms have applied when customers decide to switch their investments over to another platform.

Mcluckie said that the business models being pursued by some fund supermarket platforms in response to the RDR changes and the forthcoming new platform rules stem from the way those companies have been traditionally funded – through client fees and the retention of cash rebates from fund managers.

"Fund supermarkets have become bloated and have more costs to maintain as a result, so they are now looking at ways of keeping what they have got going forward now the rules have been changed and one revenue stream has been cut off, or at least will be cut off by 2016," Mcluckie said.

Under the new platform rules, finalised by the FCA last year and set to take effect from next month, platforms must present "retail investment products to customers without bias". Mcluckie said, though, that the regulator should offer guidance on what is meant by that rule because there is evidence that some platforms are "flying in the face of that rule" in how they are interpreting it.

"How can you present your own solutions to clients and still retain no investment bias?" Mcluckie said. "There are platforms out there that are pushing investment solutions that would seem to be at odds with the new platform rules around not presenting any investment bias. If the regulator has stated very clearly that platforms should present no investment bias then they need to be crystal clear about what that means and they need to take corrective action against those that choose to ignore those new rules or those looking to take a different interpretation of those rules."

"'Without bias' seems clear to me but others are taking a different tact and not being challenged on it," he added.

He said that Nucleus tries to maintain an independent approach to their service by not "pushing any products or selling any funds" and that the company tries to get financial advisers involved in the way its platform works through engagement in development and strategy meetings and in two-way user sessions.

"It is essentially about working with advisors and presenting everything in a consistent way with open architecture and not favouring one fund over another," Mcluckie added. "That is up to the adviser rather than us trying to influence that decision."