The Financial Conduct Authority has been left looking caught on the back foot as its consultation on the platform market study draws to a close in the midst of the Woodford fund suspension with little focus on anything other than exit fees.
The platform market study final report was released in March with exit charges the only major item on the agenda for potential rule changes, despite the interim report, published July 2018, detailing a number of areas the FCA promised it was going to look into.
The consultation on the exit fee ban closes on Friday 14 June.
The absence of other potential remedies now looks like a glaring omission as the impartiality of the Hargreaves Lansdown Wealth 50 gets called into question in the face of its steadfast support for Woodford Equity Income. Its clients are reported to account for almost a third of assets trapped in the £3.5bn fund.
Even the Treasury Select Committee has got involved with chair Nicky Morgan demanding answers from Hargreaves Lansdown over its cosy relationship with Neil Woodford.
Buy lists ‘swept under the carpet’
The FCA has also been forced to respond to the situation. In an article published in the Financial Times, chief executive Andrew Bailey pointed to the responsibilities platforms like Hargreaves Lansdown have when it comes to singling out funds for inclusion on best buy lists. Bailey was vague on whether it was an area the FCA would be looking to address further.
Portfolio Adviser has reached out to the regulator for clarification and is awaiting a response.
Lang Cat director Mike Barrett says: “It’s interesting they’re talking about that now having virtually just completed the platform market study where they swept all that under the carpet.
“The consultation for the platform market study closes on Friday and the only topic up for consultation for potential rule change is exit fees, which is obviously another thing that is potentially not good news for Hargreaves.
“There’s absolutely nothing in terms of proposed remedies for disclosure or best buy lists or any of the topics that have come to the fore in the last couple of weeks.”
‘The horse has bolted’
SCM Direct co-founder Gina Miller (pictured) also pointed to the FCA being on the back foot. “The Woodford saga reveals not just the conflicts of interest contained within best buy lists, but regulatory failing whereby the FCA is yet again addressing an issue after it has blown up – closing the gate after the horse has bolted.”
The platform study has gone the way of the asset management market study, Miller adds.
“In that study the FCA detailed the issues and the remedies in the first study, but due partly to deferring their responsibility and pandering to self-interested, industry lobbying, the FCA’s final remedies were less than worthless.”
Even where the regulator is consulting on changes in the platform study, Miller is underwhelmed.
“The FCA incredibly intends not to ban product-based exit fees charged by vertically integrated firms, for example SJP. How can it be remotely fair to either platforms or consumers for the FCA not to ensure a level playing field?”
FCA said buy lists help investors pick good funds
The interim and final platform market study reports both address buy lists, but ultimately the regulator concludes they “appear to help investors pick well-performing funds” – an assertion that the Woodford suspension appears to have undermined.
“We expect best buy lists to be constructed on an impartial basis,” the FCA said in its final position on the issue, without any calls for a change to the status quo.
Their conclusion came months after Hargreaves was criticised over fund selection in its revamped Wealth 50, which saw 25 funds dumped and Fundsmith Equity continuing to be shunned. Fundsmith has made it clear that it will not negotiate with Hargreaves on fees putting it at loggerheads with head of research Mark Dampier, who has said the OCF is too expensive for inclusion on the buy list.
Fundsmith manager Terry Smith said at the time of the Wealth 50 revamp: “I have long said that Hargreaves Lansdown’s recommended funds were chosen mainly for fund managers’ willingness to comply with a charging structure which enables Hargreaves Lansdown to maximise its own profitability, and not because they perform well for investors. This needs to stop.”
A catalyst for regulated research?
The Woodford suspension raises a serious issue over where responsibility falls for fund research that promoted and validated the Equity Income fund in the eyes of retail investors, says Gbi2 managing director Graham Bentley.
“Fund research isn’t regulated. Perhaps this will be the catalyst for a change in that regard,” Bentley says.
Hargreaves was among the last to drop Woodford from its buy list, the Wealth 50, only doing so after the fund suspension was announced at the start of June. However, independent research agencies Morningstar and Square Mile were also slow to drop their recommendation for the equity manager, only doing so this year.
“In many other professions there would be a case for compensation – do researchers owe an apology or more to the advisers who followed their recommendations?” says Bentley.
‘Platforms should be an administrative operation’
But it is platforms in particular where the FCA needs to focus its attention on buy lists, according to Candid Financial Advice director Justin Modray.
“We are getting to the point where there really has to be a separation between investment platforms, which in effect should be a pure administrative operation, and any other parts to that business that may well involve advice or what looks like proxy advice, in terms of best buy lists,” Modray says.
The regulator is likely to clamp down on buy lists in light of the Woodford suspension, he reckons. “The sensible option to me would be where platforms have both the administrative service, but also offer advice and guidance, there should be a very definite distinction between the two.”
But Interactive Investor chief executive Richard Wilson says when platform buy lists are impartial they are a useful tool for self-directed investors, echoing the FCA’s conclusion, which was originally examined in an occasional paper published in October 2017.
“Recent events relate to one specific rated list and we think this is where the focus, at this point in time, needs to be,” Wilson says. “This has to be the starting point, and if wider questions then need to be raised, we would absolutely welcome it. But regulatory prescriptions are not always the best medicine and can lead to unwelcome side effects.”
‘A lapdog of the industry it pretends to regulate’
Barrett says it is “very easy with the power of hindsight to look back” at the platform market study’s shortcomings, but admits the consultation coming to a close weeks into the Woodford fund suspension is embarrassing timing for the FCA.
“While there were probably a lot of people speculating about how these best buy lists had the potential to cause harm and that people could be misled, they hadn’t actually seen any evidence for that,” he says. “You could make the argument that evidence has now become very public.”
But Miller is less sympathetic, stating sweeping changes are needed at the FCA.
She says: “The FCA, under the stewardship of Mr Bailey, has descended into a soundbite regulator, that is no more than a lapdog of the industry it pretends to regulate and the consumers it pretends to protect.”
