Platforum: Is adviser platform pricing Consumer Duty compliant?

Platforms, like other players in the value chain, have focused on the price and value outcome of Consumer Duty. But the impact on platform pricing has been minimal so far, according to findings in Platforum’s latest UK Adviser Platforms: Pricing report.

Platforms’ job of assessing and evidencing fair value has been (and will continue to be) complicated but in the months since the July implementation deadline, there’s been no spate of changes and media commentary à la St. James’s Place.

Yes, the gradual elimination of exit fees has accelerated. But such a development really started in 2018 – long before Consumer Duty – and platforms made so much progress in very few years that the Financial Conduct Authority abandoned its wider work on exit fees in 2020.

Margins are low for platforms already and wiggle room is therefore scarce

The holdout platforms have argued – with some logic – that transferrals do involve extra work (and risk) which can justify the extra charges. But there are other barriers to switching which are now of greater concern, including their speed and difficulty, even if exit fees themselves remain a deterrent.

One platform in the last year has increased its rate card charges (Scottish Widows Platform), and one platform cut them considerably (Novia). But neither change was especially prompted by Consumer Duty. Novia’s repricing was long overdue, while the Scottish Widows Platform essentially adopted the rates of its recently absorbed sister, Advance by Embark.

Other recent changes to pricing structures have been tweaks rather than overhauls – cutting individual charges is much easier than adjusting a platform’s entire pricing structure. Many advisers and their clients are on bespoke platform pricing anyway.

Margins are low for platforms already and wiggle room is therefore scarce. Evidencing the appropriateness of existing prices and then tidying up the edges seems to have been platforms’ main pricing response to the Consumer Duty. It is an unenviable task, but a necessary one.

Platforms made so much progress in very few years that the FCA abandoned its wider work on exit fees in 2020

So, what has Consumer Duty achieved with adviser platform pricing so far?

The most important impact has been on the treatment of clients’ cash holdings on platforms.

Last year, we segmented platforms on whether they paid any interest back to clients and whether they charged fees on cash holdings. This year, only one platform covered by our research continues to pay out no interest (True Potential) – but there is still a gaping void between platforms that pay all the interest back to their clients and those that retain most of it for themselves.

This year, the FCA has been investigating platforms’ client interest payments under the Consumer Duty initiative and platforms will have to think much harder about how they can justify their practices.

Retaining some interest as compensation might seem reasonable if platforms are actively managing clients’ cash holdings to maximise returns and provide consumer protection, but this is not always in their skillset and charging a platform fee on the cash as well would be double dipping.

There is still a gaping void between platforms that pay all the interest back to their clients and those that retain most of it for themselves

Another justification for retaining some of the interest on cash deposits is that the practice keeps other fees lower. Readers with long memories will recall that banks employed a similar argument in relation to the egregious profits they made from payment protection insurance.

Reducing fees by deducting them from clients’ gross interest receipts is more tax efficient than reducing ‘effective’ fees from net returns. But there are difficulties there with its disclosure to clients and the cross-subsidisation is potentially not fair.

Fundamentally, though, clients should not have large long-term cash deposits on platform.

With much higher interest rates, serious sums are at stake and thus potential for serious harm. Consumer Duty’s coincidental concurrence means the FCA has ample reason to be laser focused on this issue, although, arguably, the practice should have been stopped long ago.

With much higher interest rates, serious sums are at stake and thus potential for serious harm

Transact is particularly vocal about this, being one of the five adviser platforms that don’t take a cut from clients’ interest, comparing it to taking “half of the dividends clients earn from their investments”. Advisers, in our recent discussions with them on the matter, have called it “baffling” and “a scandal”. Direct-to-consumer platforms have been pilloried in the mainstream press for generating huge profits from retained interest.

Whether and how the practice will be regulated in future will depend on the results of the FCA’s investigation. But the Consumer Duty, in general, will keep evolving through further guidance, interpretation and enforcement, and platforms will always have to keep a watchful eye. It is certainly complicated being compliant.

William Moss is an analyst at Platforum. For more information on the UK Adviser Platforms: Pricing report, get in touch.