Platform due diligence in the consumer duty age

The introduction of the Consumer Duty has significantly increased the level of rigour that the FCA expects from an advice firm’s initial and ongoing due diligence of the investment partners and platform providers that it is prepared to recommend to its clients. The FCA expects advice firms to carry out a two-step ‘research and due diligence’ selection process:

“We expect firms to carry out research on… the market to identify the solution(s) that are in the client’s best interests, then conduct detailed due diligence on the recommended solutions.”

“In relation to the platform market, we expect firms to carry out research and draw up a shortlist of platform providers, then carry out due diligence on the shortlist. Is it appropriate to entrust the provider with client assets?”

So, how do advisers establish whether a platform can be entrusted with client assets? The FCA expect advisers to consider a wider range of factors than may have been considered previously.

In fact, the FCA has already warned industry players about the potential risks it sees arising from poor governance and oversight, fraud and scams, poor safeguarding of client money and assets, failure to give best execution, inadequate technology and operational resilience, inadequate financial resources and conflicts of interest, among other issues.

The Consumer Duty makes it clear that the Adviser has the clearest oversight of the customer’s overall position and the recommended advice package, so they must assess the likelihood of delivering the expected outcome to the customer. This should include an analysis of whether the overall cost to the consumer provides fair value as well as the risk of a foreseeable harm endangering that expected customer outcome.

Specifically, it means the adviser must look along the distribution chain to proactively consider the foreseeable harms of using a particular platform. That includes thinking about what could conceivably go wrong and checking that clients would have the appropriate protections in place.

Several firms can be involved in the manufacture and distribution of investments, and all can influence customer outcomes. Each must consider foreseeable harms as part of their due diligence of other counterparties in the distribution chain, but the Duty puts the onus on advisers to consider the total cost and value of their recommended advice package as well as the risk of foreseeable harms that could endanger a good customer outcome.

• Does the platform have the right governance and risk management controls in place?
• Could technology issues result in client losses and are there clear lines of accountability and robust client protections in place?
• What are the risks within the technology stack and the operational resilience of the platform?
• What about data security and the ability to withstand fraud and cyber-attacks?
• Is the platform financially strong enough to make the significant investments required in technological innovation to remain a leading platform in future?
• Who is the platform owner and what are their medium-term intentions and incentives? Is the owner comfortable with how much ongoing investment is required in platform technology?
• Might the owner be incentivised to sell the platform should economic conditions change? Who will they sell to? And will this create a potential re-platforming event?

All of this demands a new approach. Platform due diligence has become emphatically more than the box ticking exercise it may have been in the past. A deeper dive is expected as well as a more considered analysis of how a platform manages financial, operational, and technological risks. It also means thinking differently about financial strength, one of the most critical considerations in the platforms market.

Under a dynamic approach to estimating foreseeable harms, financial strength becomes more than a solvency stamp, it means considering the ability to invest in the platform development roadmap. It becomes a strong proxy for the future health of a platform since a platform owner must have the ability to continually invest in functionality, user experience and service. Any platform that cannot invest risks stagnation, acquisition, and the potential re-platforming of client portfolios.

There is still a belief among some advisers that if assets sit with a custodian, or if there is a compensation scheme, then financial strength does not matter. Without strong financial support, the risk of business failure is more likely and could, ultimately, lead to a distressing and uncertain route to asset recovery or compensation for investors. It’s not the experience or outcome any customer would expect. And, under the expectations of Consumer Duty, entrusting client assets to an evidentially weak platform could be seen as a foreseeable harm.

The Consumer Duty requires advisers to consider whether the total cost of advice to the customer, including all platform and product fees provides fair value. Let’s recap what the FCA expect under the Duty’s Value For Money pillar:

• Assess the total cost of a product to a client, including advice, platform and provider charges.
• Assess value-adding benefits such as extra features, better support, superior convenience.
• Demonstrate ‘fair value‘ to clients by reasonably balancing costs and benefits.
• Monitor value over time to ensure it does not deteriorate and act if it does.
• Check that products offer value to all clients, including vulnerable customers
• Check that older products keep their value in relation to newer products

It’s clear that value for money in financial services is about much more than the price paid – it is about the customer outcome received and the customer experience felt on the journey towards that outcome.

In a platform and investments context, while price is still a critical component, it is only one key aspect of the value for money that a consumer ultimately receives from a range of possible propositions that can offer very different customer experiences and outcomes.

Significantly, customers do not have access to whole of market information that allows them to benchmark their advised platform experience. Customers see benchmarked fund performance for the funds they are invested in, but they typically do not have access to the same kind of comparisons for platforms.

While many of the benefits of a platform accrue to the client, some are specific to the advisers or paraplanners who use platforms regularly on behalf of their clients. Platform features, like data integrations and straight through processing, which are principally adviser benefits are still a key part of client value for money since there is a cost in adviser time of dealing with a poor platform that lacks connectivity and relies on time consuming, paper-based processes. This cost invariably impacts the client either in terms of their total cost of advice or in terms of their advised experience.

Any platform value for money assessment therefore demands careful consideration of a range of factors that can ultimately influence the customer outcome and experience. And those benefits can and should also be articulated to the end customer.

The FCA puts the onus on advisers to evidence they have taken all reasonable steps to deliver value to their clients. This requires a different approach to the financial advice model of old where an adviser recommended a product, selected funds on a platform then worked back to document the recommendation. Now, it means running deeper platform due diligence regularly. This can ensure advisers are accessing not just the right technology and tools, but also collaborating with the providers and people that have a shared determination to deliver good customer outcomes.

The Covid lockdowns catalysed a digital-first approach within the platform industry, with significant focus on straight-through processing, back-office connectivity, and the integration of adviser tools.

However, some of the recent narrative within platforms has become overly focused on the tech stack with less heed paid to other value-adding factors within a platform proposition, like platform governance, financial strength and the service and support model that advisers need to access whenever they need something beyond the BAU.

A more rounded approach to platform value for money recognises that people ultimately do business with people. While delivering high level of integrations and providing intuitive digital journeys is key, platforms also need to be there to provide support to advisers when the unexpected happens.
Complex cases, vulnerable customers, cases outside standard process – all require people, and this is where having a relationship manager and access to in-portal support and technical specialists can be particularly valuable.

Financial strength and platform governance are also critical but largely intangible factors when it comes to comparing platforms. Advisers need to consider the range of risks that platforms would be subjected to by an episode of acute market volatility and heightened industry outflows. How well would each of the platforms on the due diligence shortlist weather the storm?

There can, inevitably, be a higher degree of complacency around these intangible criteria… until they are really needed. Under the need to consider foreseeable harms, they should now form a central part of any platform value for money comparison.