D2C platforms, fund range and vertical integration

Out-Law News | 16 Jan 2014 | 3:07 pm | 2 min. read

John Salmon’s Financial Services blog

Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.      

Online tools that promote choice and simplify decision making have become critical to investors looking to actively manage portfolios without the help of financial advisers. Of course, convenience and simplification have always been at the heart of sustainable e-commerce.  

But while much of the attention this week has focussed on the future of platform pricing, there has also been some discussion over platform range. It has been reported that at least one provider, JP Morgan has stepped away from a strategy of offering third party funds on a 'direct to consumer' (D2C) platform. On the face of it, if a trend towards reducing fund range on D2C platforms were to gain traction, some investors could feel as if they were losing out, left either inconvenienced or limited for investment choice.    

While JP Morgan has said that its primary reason for dispensing with third party funds is due to a lack of customer interest, other decisions to limit fund range are likely to be made as a consequence of the rule changes brought about by the Retail Distribution Review (RDR). In a world of upfront platform charges payable by the customer, the incentive to offer the products of others is reduced. 

But if we are to experience a trend towards a narrowing of choice on D2C platforms, it would yet again raise questions about the effectiveness of the new regulatory landscape in achieving its objectives. The RDR was meant to establish a resilient, effective retail investment market, not restrict the choice of viable business models opened to providers.

Graham Newitt of First Hand Consulting says that "As firms look to simplify the choices for customers and place more control around the fund selection process it is likely that a trend towards a narrower range of funds will develop in the D2C market ".

He also says that "For manufacturers such as JP Morgan, it makes sense to look at more vertically integrated models where they can provide an end-to-end solution for the customer and achieve revenue across the value chain”.

Product providers that choose to take a vertically integrated approach need to ensure that they do so in a manner that is consistent with the regulator's expectations. For instance, as applies across the board, they cannot now promote 'free' execution-only platforms cross-subsidised by product costs.

In addition, the regulator's policy statement of April last year (PS13/1) means that platform service providers who have their own funds, but do not take the exclusive distribution approach, cannot vary the charges between third party funds and their own funds to give favourable treatment to their own funds.

For those platforms that do take the exclusivity approach they may need to consider whether their decision changes the very nature of the service they are offering. With no external funds, it may be that in some situations a platform offering only proprietary funds, where there is 'not more than one' product provider, will come outside the definition of platform service provider and so be treated differently from a regulatory perspective.