This month’s system failures at Hargreaves Lansdown and AJ Bell, amid heavy trading and months after a warning from the Financial Conduct Authority, have exposed the “operational limits and inefficiencies” across the platform industry as customer numbers continue to climb.
On 9 November a barrage of trading activity off the back of Joe Biden’s presidential win and positive Covid vaccine news from Pfizer/BioNTech caused Britain’s biggest platforms to short circuit, resulting in millions to miss out on one of the biggest market rallies.
Hargreaves suffered outages on its website and app, locking customers out of their accounts or unable to execute trades, while some investors found their accounts thousands of pounds in debt due to a technical glitch duplicating trades made on the platform.
Rival platform AJ Bell also experienced “intermittent service issues” which resulted in delays and users not being able to access their accounts for “a period of time”, as did Fidelity’s Personal Investing platform. Across the pond Charles Schwab, ETrade, Vanguard and TD Ameritide also suffered from outages as investors flooded the markets to cash in on the positive vaccine news.
Altus Consulting platforms director Ben Hammond says while the recent platform outages at Hargreaves and AJ Bell are not a common occurrence, they “highlight the operational limits and inefficiencies that exist across the whole of the financial services industry”.
FCA discussing tech failures with Hargreaves and AJ Bell
The Financial Conduct Authority told Portfolio Adviser it is “aware of the issues” and had reached out to the affected platforms following the Monday meltdown.
“We expect investment platforms to plan for unexpected scenarios so that they can continue providing their services to customers and maintain operational resilience,” an FCA spokesperson said.
Lang Cat consultant Mike Barrett says operational resilience at retail platforms has been on the regulator’s agenda for a while now but in the last 12 months it has ramped up its efforts.
The City watchdog along with the Bank of England and Prudential Regulation Authority launched a consultation in December 2019 on this very topic, with new policy proposals putting the onus on regulated firms to identify and stress test the systems which prop up their most important business services to avoid harm to customers and the market.
In February, weeks before the Covid sell-off kicked off, the regulator doubled down on its efforts in a Dear CEO Letter to platforms, warning they need to have sufficient investment in tech and resources to prevent services to customers and advisers being “unavailable, intermittent or restricted”.
After the recent string of operational failures, “the FCA will not be looking at things confidently right now,” Hammond says. “Maybe these outages are just what the industry needs to ensure further action is taken.”
“Technology investment is never a quick win, but operational resilience is critical for the platform industry,” says Interactive Investor CEO Richard Wilson. “One provider’s issues affect the whole industry from a reputational perspective“.
II was one of the only major platforms not to experience any problems with its sites or trades during the recent blow-up.
‘If everyone is going to be piling in, the system is going to struggle’
This is not the first time the platform giants have been caught out by market surges and left investors sitting on the side lines. Hargreaves had to issue an apology for “intermittent service issues” on 13 December after Boris Johnson led the Tories to a landslide victory in the 2019 general election which sent the FTSE 350 surging by £33bn.
Investors wanting to place trades the day after the Brexit vote were also put on hold as Hargreaves struggled to get prices from market makers amid a frenzy of trading activity which also saw AJ Bell and TD Direct Investing, which was acquired by II months later, encounter issues.
Trading volumes on 9 November were significantly higher than both these market events, smashing previous records at AJ Bell, II and Fidelity. In Hargreaves’ case trading volumes were three times higher than the normal daily average.
Barrett says it is difficult to pinpoint what exactly caused the platform giants’ latest malfunction.
“There comes a point where if everybody’s going to be piling into it then the system is going to struggle. It’s just inherent on every website. If enough people hit it, then it can start to slow down.”
Platform customers spike during Covid crisis
All the major platform groups have sunk millions into the tech that makes their services tick in recent years. But during that time customer numbers across the D2C platforms have skyrocketed.
Hargreaves has gone from having 836,000 users in 2016 to just over 1.4 million in 2020, a 70% increase, while AJ Bell’s customer base has more than doubled from 140,451 to 281,094.
Since the Covid crisis took hold in March this trend has intensified with retail platforms taking in record numbers of clients and reporting larger volumes of trading activity.
Hargreaves added 188,000 clients in the year to 30 September 2020, a noticeable spike from 2018 and 2019 where it brought in around 135,000 customers each year. Preliminary figures from AJ Bell show it added 63,000 customers over the year to September, 52,070 of which were D2C customers.
To test their operational resilience platforms will be performing stress tests, Barrett says, where they take the average number of users on their site on a day-to-day basis and multiply that by four to 10 times to see whether their systems can cope.
“I would suspect that the load they got on 9 November was probably quite a bit above that,” he says.
Hammond agrees IT teams across the industry should be stress-testing so clients can “trade what they want, when they want”.
“No company wants to lose an adviser or client they’ve spent much effort and cost attracting, but people are fickle, and this is exactly what will happen if they are not happy with the value for money they are getting.”
‘Point of failure’ with market makers
Barrett suspects the underlying trading functionality was also “a point of failure” on the record trading day.
In order to execute trades online brokers and platforms in the UK rely on a network of Retail Service Providers (RSPs), or market makers, to provide them with the most up-to-date quotes on stock prices, a process which ordinarily takes a fraction of a second. After receiving an electronic quote, the broker has a 15-second window to decide to accept the offer price and if they do the RSP places the trade.
AJ Bell admitted this was the source of its problems during the surprise market surge.
The Financial Times reported thousands of Hargreaves customers found their accounts thousands of pounds in debt due to a technical glitch duplicating trades made on the platform. Neither AJ Bell nor Fidelity reported issues with duplicate trades.
But Barrett thinks this explanation will provide little comfort to customers. “You pay Hargreaves some reasonably high fees with an expectation, not unreasonably, that there’s actually going to be a service there when you want it.”
How have D2C platforms responded?
Hammond expects the latest trading incident will prompt both platform providers and DFMs to take a good hard look at their systems.
“There will be some definite lessons learned, with all platforms and wealth managers, not just HL and AJ Bell, looking closely at their underlying technology and operations to reduce the risk of another occurrence,” he says.
AJ Bell, Hargreaves and Fidelity all said they had taken action to address the issues on 9 November.
A spokesperson for Fidelity said the firm “acted immediately to increase our capacity and to further enhance our service to resolve this issue,” adding that no further issues had been reported.
When asked about steps it was taking to avoid future problems, an AJ Bell spokesperson said: “We continually monitor the performance of our platform and processes so that we learn where we can improve and this feeds into the significant investment in technology we make every year.”
A Hargreaves spokesperson said the D2C firm had acted “swiftly to resolve any issues caused” for the “small number of clients” that experienced difficulties “at times” throughout the day.
