With new rules on platforms coming into force in April, what do wealth advisors need to be aware of and prepare for? An expert in the field takes a look.

The UK wealth management industry faces a range of regulations about platforms that come into being on 6 April this year, such as laws stating that platforms can’t retain rebates on new business, must not cross-subsidise fund and platform costs, and are banned from offering cash rebates. From April 2016, platforms cannot retain rebates on legacy business. The changes are a logical follow-through from the Retail Distribution Review regulations that have banned advisors from collecting trail commission payments from fund management firms. But getting the fine details right is what the industry must focus on. Mel Holman, from Compliance and Training Solutions, or CATS, looks at some of the steps firms in this space must take. The views are those of the author and her firm and not necessarily shared by this publication.

Managing risk
A number of firms have gone through the Financial Conduct Authority regulatory reviews, having first attended the Business Risk Awareness Workshops. The purpose of these interviews is for the FCA to discuss with the principal of the firm its governance, controls and identified risks to the firm. This can range from is there a business continuity plan in place to Key Man risk. There is a danger that once you drill down what risks a firm faces, and the management team realises what they have to manage, they just bury their heads in the sand and do nothing.

It is important to realise that you will never manage risk totally out of the firm - it is how risk is managed which is key.

Platform risk
Using platforms in the modern world is pretty much mainstream now. Many fund managers won’t allow clients or advisors to access their funds direct, only via a platform or product providers which offer open architecture products. So whilst this might be something that has arguably been forced upon advisors to operate in a modern world, the firm still needs to identify and manage the risk. Many firms when they first start using a platform conduct their research in earnest; then the ongoing due diligence and research tends to wane.
Regardless of whether you are an independent or restricted advisor platform, due diligence should be revisited on an annual basis.

The due diligence exercise
When looking at the due diligence exercise, there are a number of factors to consider. A starting point might be to drill down the number of platform providers to consider in the first place. Firms may use Adviser Asset, Capita, Platforum or Defaqto as a starting point. The firm needs to write down what is important to them and their clients – what do they need to deliver a service to their clients?

Once the firm has identified platforms that may meet the client needs, questionnaires should be sent out to the platform providers asking for more detail. Providers are getting more used to these requests so obtaining the information should not be that hard.

If you haven’t conducted due diligence recently then factor in time to do so. As the Nucleus Due Diligence white paper published in January 2014 confirms, the changes to the COBS rules will place the onus onto firms to make sure that the platform adheres to the rules set out in PS13/1. This means asking more in-depth questions. The white paper Nucleus has provided provides some excellent questions for advisers/firms to ask the platform.

Once you have received all of the completed due diligence questionnaires from the providers selected, take time to read through them. Have they answered all the questions you posed to them?  If not, have they given a reason for this or have they just ignored the question totally? What does this tell you? Is this information you feel you could make a judgement call on or is it pertinent to your due diligence and the culture of the platform provider?

The last stage of the process is to document your conclusions and confirm why the firm chooses to remain with the same platform provider or consider making changes. If changes are to be made, will this be for new clients or gradually move existing clients too?

This process is not a quick process by any stretch of the imagination. However, the firm will be able to evidence (which is the key thing here) that they have identified a risk to their firm, conducted some due diligence and come to a conclusion. While there is still a risk that the platform may get taken over, become insolvent, not meet FCA rules at a later date, at least the firm can show that it has sufficiently challenged the firm and came to the conclusion that such events occurring were small/ manageable given the firm’s target market and current market circumstances.