While exit fees dominated the headlines following last week’s publication of the Financial Conduct Authority (FCA) Investment Platforms Market Study Final Report, or MS17/1.3, one important point may have been overlooked: a warning shot over anti-competitive behaviour.
The FCA paper is worded subtly, but sufficiently, raising the eyebrows of certain market commentators.
“It might just be the FCA reminding everyone to play nicely,” says Gavin Fielding, editorial director at Fundscape, or it might be paving the way for harsher consequences to some of the commercial arrangements in place.
The platforms market study, published last Thursday (14 March) read to be fairly ambivalent to fund discounts on platforms, concluding “on average, discounts are small – around 8bps – and the amount of assets under administration (AUA) in discounted funds increased slightly over 2013-2017.”
Most-favoured nations clauses
More concerning, seemed to be the wide ‘most-favoured nations’ (MFN) clauses in place, which stipulate that a fund group offer a platform exclusive and ‘best’ terms, of which the FCA says: “In principle, such arrangements have the potential to restrict competition, although we have not determined the ultimate effect of these arrangements.”
While discounts – ranging from 8bps to 38bps were “to some extent, to be expected”, given the commercial power of larger platforms at directing flows, the FCA continues: “But we found evidence of commercial arrangements between platforms and fund managers where the fund manager commits not to offer lower fund charges on competing platforms – an example of MFNs.
“These provisions could create an explicit constraint on the prices a fund manager can set for its own funds across different platforms. We also found schemes which appear to incentivise fund managers not to offer lower prices to other platforms as part of the broader commercial relationship.”
The FCA then outlines the various ways in which such “provisions” could be anti-competitive.
CMA has more teeth than the FCA
Fielding says that the FCA stated it has “evidence” was very significant, and any evidence should have been passed to the Competition and Markets Authority (CMA).
He adds that the CMA has far more teeth, with the power to bring “almost unlimited penalties” and criminal proceedings.
The FCA declined to comment, but its website states its position on competition law as: “We have powers to enforce EU and UK competition law regarding the provision of financial services.
Competition law forbids:
- cartels and other potentially anti-competitive agreements, and
- abuse of a dominant position
“Examples of cartels include agreements to fix prices or share markets. Examples of other potentially anti-competitive agreements include a distributor agreeing with its supplier not to sell below a particular price.”
Fielding says, to his mind, that last point maps directly to MFNs.
Platform giants deny wrongdoing
Larger players – particularly D2C or vertically integrated business – with the clout to influence flows, not just through their discounts but their buylists and other marketing capabilities, such as Hargreaves Lansdown, Standard Life and Old Mutual (now Quilter) and Fidelity FundsNetwork might be named among those where this is more likely to apply.
Hargreaves Lansdown’s head of communications, Danny Cox, says: “We use the collective purchasing power of our 1.1 million clients to reduce the cost of investing, and there are times when we are offered exclusive deals. However, we do not ask for any ‘most favoured nation’ in the terms.”
A Standard Life spokeswoman says: “We do not use [MFNs] on either Standard Life Wrap or Standard Life Elevate. We have the discounted share class but we do not have a MFN clause in place.”
While concerns over MFNs do not appear to be widespread, the paper makes reference to a historical case where the Competition and Markets Authority (CMA) investigated MFN clauses in contracts held between a price comparison website – with multiple reports naming Compare the Market – and several general insurers as in breach of competition law. The case is ongoing.
Platforms with big back book most at risk
However, where the clauses in the case of Compare the Market might have prevented consumers from getting their best deal, unless there were to be any huge discrepancies in suitability, the risk of consumer detriment is far lower.
As Mike Barrett, consulting director at The Lang Cat, says: “The same team working on [the platform study] will be the same team working on the asset management market study. They will talk to their colleagues and refer things on but they won’t have a huge problem with the customer outcome. If you are put into Lindsell Train as opposed to Fundsmith, you’re probably still doing alright.”
Downplaying the issues around MFNs, he adds: “I can’t see it being a huge threat to the likes of HL.”
He says rather than apply to new business flows, issues might be more associated where large D2C platforms have a big back book.
Barrett explains: “They will negotiate discounts on the buylists but then often you will see the underlying assets on the in-house multi-manager funds will hold the same funds. So effectively they are directing a little bit of flow but can demand a discount on, say, a UK equity fund, and then hand over a mandate of £100m to UK equities into one of our old managed funds. That’s the appeal, the win for the asset manager is then the large mandate of very sticky assets, rather than it being about any new business coming through.”
