The UK platform model – no panacea for Europe?
Platforms promise easier and cheaper administration of client assets, as well as support for business models in the wake of RDR. Yet it is not certain that the UK experience can be transferred to the rest of Europe.
The UK platform industry serving financial intermediation has been waiting for over a decade to see the fruits of its labour.
RDR, the Retail Distribution Review, is seen as a key tipping point in the adoption process, as it is expected to encourage IFAs to adopt platform solutions in order to maintain their businesses going forward.
Fraser Donaldson, Insight Analyst for funds at Defaqto, an independent financial research company, says that RDR is pushing the change because it wants IFAs to move away from a commission-driven model.
This push is arguably showing the way to the rest of Europe’s financial services industry, and is under observation from other market regulators looking to see how the UK’s platform experience develops.
Donaldson sees two arguments on the question of whether the platforms for the UK market could be adopted for pan-European use, were the RDR principles to spread across the Continent.
On the one hand, many of the platform solutions were imported into the UK anyway, meaning that they have proven the idea that solutions can be exported to different markets.
However, it is also the case that these solutions are by now too UK-specific, meaning that any platform provider would essentially have to start from scratch when entering any next new market.
One explanation is that the platforms have developed complex workarounds to take account of the UK tax system.
Some elements are transferable, Donaldson adds, and there is some evidence that basic fund platforms are already working across borders. It is the tax wrappers that are UK specific.
Long awaited traction
It is also worth remembering that platforms have taken a long time to achieve traction in the UK market.
As a result, most platforms in the UK are looking at the UK. Also, they have barely scratched the surface in terms of overall AUM that they account for.
Those responsible for platform regulation are themselves to blame for some of the delays in adoption by UK IFAs.
This is crucial because of the difference between so-called supermarkets which Donaldson defines as platforms for collectives, and which require managers to pay rather than the end client and wraps, which allow access to instruments beyond simple collectives, such as direct equity, and offshore funds.
The differences between these are highlighted in the rebates issue. Where the supermarkets may offer rebates on the fees in their pay-to-play model.
Wraps tend to pass the cost back to the client. At the heart of this debate is the question about who pays for the platform.
Donaldson says that there are some suggestions the regulations set to be published by the FSA after the summer will address this issue.
This argument rests on the fact that rebates are banned in most of the rest of the industry.
However, he adds that a total ban could hit clients, who, despite the objectives of the FSA would actually end up paying more.
This could undermine the case that platforms provide a better, cheaper service to clients.
Donaldson is fairly certain that the bigger firms will have the required international experience to be able to roll out pan-European solutions over time, but the idea remains that platforms will need to be tuned into the local markets.
That said, the UK has a particular place within Europe’s overall financial services market.
If a platform can make a success of its UK business it is in a strong position to make it in other European markets, Donaldson says.