I hadn’t realised until yesterday that the FCA has a SIPP and Platform team in the Retail Investment supervision department.
For most of us , the idea that we are buying into a platform when we save into a pension is counter intuitive. Most of us don’t stop to think where our money is going , let alone embrace the concept of an investment platform.
I remember at Port Talbot, watching the eyes of steel men glaze over as advisers talked to them of the merits of the various platforms they were being offered – platforms mean different things to different people but if you work in a steelworks – it has a particular meaning which does not translate into money matters.
How platforms changed retail
Clive Waller has been dubbed Mr Platform (as John Moret is called Mr Sipp), both get their names from understanding early in their gestation, that the Self invested personal pension and the platforms they provide, could radically redefine the retail financial services market.
When Ian Taylor and Transact started offering advisers the opportunity to put together their own funds using Transact’s platform technology, the IFA moved from distributor to manufacturer and vertical integration had begun. Now a few other entrepreneurs have followed and there are rival platforms to Transact – Novia, Nucleus, Cofunds, AJ Bell and a few insurers who have bought into the technology. Platforms are immensely powerful making their founding entrepreneurs every rich.
Add to that list a Kiwi – Adrian Durham – who brought FNZ to these shores and you get a reasonably complete picture of the platforms that IFAs use to make a living and build embedded value in their businesses.
Any IFA reading this will smile and ask me to tell them something that they don’t know. Anyone other than an IFA, will marvel that platforms and the SIPP tax wrappers that come with them – are important enough to merit a department of the FCA.
Platforms may not have changed the world but they have changed the dynamics of the funds industry.
Institutional platforms miss the boat
I noticed that Professional Pensions ran an investment platform award at last week’s shindig in Park Lane. Mobius won the award, a company that most people have never heard of. I was head of sales for a time for its previous incarnation (Investment Solutions) and since I’ve left it’s stopped pretending it can sell funds of funds to investment consultants and learned from retail platforms to empower consultants to do that for themselves.
Mobius is allowing institutional advisors to offer vertically integrated products to their clients and to benefit from those products precisely as the retail platforms did. The difference is that rather than being a pure funds platform, Mobius is an insurance platform and the funds it offers come wrapped (reinsured) by Mobius and have to obey the permitted links rules pertaining to insurance companies.
These rules prevent the insurer offering inappropriate investments to its policyholders. Permitted links are currently under review by the FCA.
The review has been prompted by protests from insurers and advisers that insurance platforms cannot provide the flexibility to advisers available from retail platforms and in particular cannot offer what is referred to as “patient capital”. The issues are to do with illiquidity, particularly the illiquidity of property and other forms of infrastructure investment.
Institutional platforms like Mobius have not been able to be as racy as their retail cousins because they use reinsurance wrappers which require them to abide by permitted links regulations.
Meanwhile the non- insured institutional platforms offered by custodian banks, have failed to pick up on the prevailing trend toward vertical integration and have missed the boat.
A boat that may have been worth missing
Many of the SIPPs and platforms that they use, are now polluted with toxic assets like Dolphin Trust (that I discussed yesterday).
Allowing advisers to shove rubbish into your SIPP and on to your platform is a risky business. SIPPs have argued in the past that they cannot be responsible for what regulated advisers choose for their clients and that they don’t have a supervisory role.
Because the platforms don’t reinsure funds – the permitted links rules don’t apply and there is little or no friction. This has led to many funds and vertically integrated funds of funds appearing on reputable platforms , going belly up and leaving the platform, the SIPP and the adviser with a lot of explaining to do.
Typically the adviser walks away and either sets up abroad or phoenixes into another entity in the UK leaving the SIPP manager and the platform holding the baby.
It is the FCA’s job to find somebody accountable for what is happening and that is proving very difficult.
It is extremely difficult to recover the money that is lost from a fund failure and often the cost of recovery wipes out any gain to the investor from the recovery process. That is why retail investors have direct access to compensation from the Financial Services Compensation Scheme (FSCS).
But FSCS – like the PPF – needs protecting, There are only so many claims that can be passed on to other advisers , platforms and SIPPs before the costs of claim make the whole shebang unviable.
Permitted links may have saved insurance platforms from the agonies that retail SIPPs and platforms are waking up to. The custodial banks that refused to play, may feel the boat was worth missing.
Hargreaves Lansdown and St James’ place
In different ways , these two organisations have redefined the way that retail platforms can operate successfully.
Both have unashamedly targeted “wealth” and kept a tight ship. To follow the conceit, their boat had pretty exclusive passenger lists and their crews make sure that those who are onboard are well vetted.
Hargreaves Lansdown has offered an execution only service that appeals to experienced investors who don’t want to use advisers while St James Place offers an advised service where the cost of advice is born by the platform and passed back to investors through higher fees.
Both models are highly popular, both companies have high levels of confidence among their customers, but their boats depend on exclusivity.
A boat for all?
I sense when talking to regulators , that they would like to see the kind of model that works for Hargreaves, SJP and for the wealth managers who use platforms responsibly, available to everyone.
We are beginning to see mass market products emerging. Pension Bee could be called a “boat for all”. Surprisingly – the workplace pensions have yet to realise their position as mass market pension providers and are failing to build the level of trust and engagement that the Pension Bee-keepers are creating with their SIPP- holders.
Organisations like Smart Pensions are getting there and it’s easy to see NEST and People’s providing a Pension Bee type service in time. The large insurers are generally caught between offering a direct service or relying on advisers. Some – such as Royal London, have decided to work with advisers exclusively, others -such as Quilter – are looking to follow the route pioneered by Allied Dunbar and now operated by SJP, the adviser platform.
All of these models are looking to provide a boat for all but none have yet found the way to meet people’s desire for a wage for life. Retail pension products remain anything but pension providers.
The future is in “Customer need”
I remain obdurately of the opinion that the boat for all is a boat that treats everyone as one and offers benefits collectively through some form or other of CDC.
I don’t see CDC as an institutional produce -even though its first UK incarnation – Royal Mail – will be an institutionally sponsored and devised product.
I think that the trust based pension structures – the master-trusts – are ideally suited to using the technology of platforms to deliver a simple one size fits all collective pension which still allows people the option to opt out into the flexibilities of SIPP platforms.
Indeed – the ongoing dynamic for pensions may be between a choice between the simplicity of a wage for life and the complexity of the DIY SIPP.
I mentioned this to the FCA’s Charles Randell when I met him last month and I’ll talk of this again when I meet the FCA’s pension team in June.
I believe that there is a middle ground that brings collectives and retail platforms together and it can be best defined today by “Customer Need”.
We need platforms, tax wrappers, advisers and regulators that recognise that customers need the choice not just of SIPPs but of not having to take any choice at all. CDC offers that other choice,