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Analysis of the introduction of rebate bans on the platform market 15 February 2012 This report has been prepared on the basis of the limitations set out in the Executive Summary and the matters noted in the Important Notice from Deloitte on page 2. © 2012 Deloitte LLP. Deloitte LLP is authorised and regulated by the Financial Services Authority. Final Report

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Page 1: UK Deloitte Platforms

Analysis of the introduction of rebate bans on

the platform market

15 February 2012

This report has been prepared on the basis of the limitations set out in the Executive Summary and the matters noted in the Important Notice from

Deloitte on page 2.

© 2012 Deloitte LLP.

Deloitte LLP is authorised and regulated by the Financial Services Authority.

Final Report

Page 2: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

IMPORTANT NOTICE

This report (“Report”) has been prepared by Deloitte LLP (“Deloitte”) for the Financial Services Authority (“FSA” or “the client”), in accordance with the contract letter

dated 21 October 2011 and its supporting documents (“the Contract”) and on the basis of the scope which is set out in the Introduction and the limitations which are

set out below and in the Executive Summary.

This Report has been prepared solely for the purpose of providing to the FSA analysis on the potential impact of the proposed FSA proposals in relation to the

banning of rebates being used to fund platforms, and cash rebates to consumers, on the platforms market, as set out in the Contract. It should not be used for any

other purpose or in any other context, and Deloitte accepts no responsibility for its use in either regard.

This Report is provided exclusively for the client‟s use under the terms of the Contract. No party other than the client, is entitled to rely on this Report for any

purpose whatsoever and Deloitte accepts no responsibility or liability to any party other than the FSA in respect of the Report and/or any of its contents.

The information contained in this Report has been obtained from the FSA, and third party sources, as referenced in the appropriate sections of this Report and in

Appendix 1. Deloitte has neither sought to corroborate this information nor to review its overall reasonableness. Further, any results from the analysis contained in

this Report are reliant on the information available at the time of writing this Report and should not be relied upon in subsequent periods.

Accordingly, no representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of Deloitte or by any of

its partners, employees or agents or any other person as to the accuracy, completeness or correctness of the information contained in this Report or any oral

information made available and any such liability is expressly disclaimed.

All copyright and other proprietary rights in the Report remain the property of Deloitte LLP and any rights not expressly granted in these terms or in the Contract are

reserved.

This Report and its contents do not constitute financial or other professional advice, and specific advice should be sought about your specific circumstances. In

particular, the Report does not constitute a recommendation or endorsement by Deloitte to invest or participate in, exit, or otherwise use any of the markets or

companies referred to in it. To the fullest extent possible, both Deloitte and the FSA disclaim any liability arising out of the use (or non-use) of the Report and its

contents, including any action or decision taken as a result of such use (or non-use).

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of

which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member

firms. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street

Square, London, EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of DTTL.

2

Page 3: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Glossary of Terms

3

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Appendices 179

Page 4: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Glossary of Terms

4

ABI Association of British Insurers

AIDB Association of Discount Brokers

AMC Annual Management Charge

AuA Assets Under Administration

APCIMS Association of Private Client Investment Managers and Stockbrokers

AuM Assets Under Management

Basel 3 A global regulatory standard on bank capital adequacy and liquidity

Bn Billion

bps basis point

CAGR Compound Annual Growth Rate

CC Competition Commission

CGT Capital Gains Tax

D2C Direct to Consumer

DFM Discretionary Funds Manager

EBIT Earnings before interest and taxes

EBITDA Earnings before interest, taxes, depreciation, and amortization

ETC Exchange Traded Commodities

ETF Exchange Traded Fund

ETN Exchange Traded Notes

FSA Financial Services Authority

FuM Fund Under Management

FY Financial Year

GDP Gross Domestic Product

GIA General Investment Account

H Half Year

IFA Independent Financial Adviser

IFDS International Financial Data Services

IFRS International Financial Reporting Standards

IMA Investment Management Association

ISA Individual Savings Account

K Thousand

KPI Key performance indicator

m Million

Mifid 2 Markets in Financial Instruments Directive 2

MIP Maximum Investment Plan

n/a Data either not applicable or not available

NB New Business

NMG NMG Consulting

OEIC Open Ended Investment Company

ONS Office for National Statistics

PP Personal Pension

PP&E costs People, plant & equipment costs

QCF Qualifications and Credit Framework

QROPS Qualifying Recognised Overseas Pension Schemes

RDR Retail Distribution Review

SIPP Self Invested Personal Pension

SME Subject Matter Expert

Solvency 2 A review of the capital adequacy regime for the European

insurance industry

TER Total Expense Ratio

TISA Tax Incentivised Savings Association

TPA Third Party Administrator

VCT Venture Capital Trust

Page 5: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary

5

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Appendices 179

Page 6: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary Background and Objectives

6

The regulatory treatment of platform services may influence whether the objectives of the

RDR are achieved. This Report considers the potential impact of banning rebates to platforms

by fund managers and cash rebates to consumers

Background to the Report

• The Retail Distribution Review (“RDR”) is due to come into force on January 1st 2013. This regulation will change the way many retail investment products are distributed to

customers.

• The key changes that implement the RDR rules will bring the removal of adviser commission, the introduction of adviser charging, the introduction of new requirements for

professional qualifications for advisers and the clarification of the status of advisers and the requirements for independent status.

• The FSA has long considered that the regulatory treatment of retail investment platforms should be considered in tandem with the wider RDR proposals, and that the regulatory

treatment of and framework for platforms has a potentially important role to play in ensuring that the overall objectives of the RDR are achieved.

• The Policy Statement (PS11/9) published on August 1st 2011 set out a clear intent to ban rebates to platforms by fund managers and cash rebates to consumers. No deadline was

included in the Policy Statement as further work was cited as being required, though the bans on rebates will in any event not come into force before December 31st 2012.

Objectives of the Report

• The overall purpose of the Deloitte work, contained in this Report, is to provide the FSA with an overview of the potential impact of banning rebates, particularly on consumers and on

competition within the wider retail investment market. It also aims to help the FSA to form a view on the appropriate timing for introduction of the changes. This is achieved in this

Report through the Business Model Analysis and Competition Analysis, the scope of which is set out below.

• The scope and core objectives of the Business Model Analysis are to:

Identify revenue streams for different types of platform models to understand how these models generate revenue.

Analyse the financial performance of a sample of platform providers.

Analyse the retail investment distribution and administration value chain, showing the position of platform providers and providers in adjacent sectors within this.

Identify the high level cost implications of implementing the proposed bans, and to provide guidance on reasonable timeframes for firms to implement the required changes.

• The scope and core objectives of the Competition Analysis are to identify:

The key competition dynamics of the platform services providers, including barriers to entry and exit.

The impact of the rebates ban on competition between platforms and between platforms and similar offerings in adjacent markets.

The implications of the rebates ban in terms of overall consumer benefits.

Page 7: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary Approach

The approach to analysing the impact of rebate bans in this report is through Business Model

Analysis and Competition Analysis, which are based on an assessment of the current Market

Background

Market Background

• The Market Background Analysis provides insight on the current state of the platform market and its stakeholders (pre-RDR) to feed into the Business Model and Competition

Analysis. The key areas that are explored in the section are the platform market characteristics, the platform business models, the key platform stakeholders and an analysis of

existing retail investment providers that fall outside of the platform market perimeter as defined by the FSA (defined as “Adjacent Markets” in this report).

• This analysis is based primarily on secondary research sources and was supplemented by the programme of interviews conducted as part of the project. Data employed in the

analysis includes financial data and RDR and rebate related costs data collected via questionnaires from 8 platforms; interviews were carried out with 21 stakeholders across the

value chain to understand their current business and strategy, as well as expected impacts of the RDR and rebate bans on their business. Data and views were collected on the

Australian and US platform markets through desk research and interviews with subject matter experts (“SMEs”).

Business Model Analysis

• The Business Model Analysis was conducted for the four main platform business models, Fund Supermarkets, Wraps, Hybrids and Direct to Consumer (“D2C”) platforms. These

business models are defined in the Market Background section.

• The Business Model Analysis analyses platforms‟ costs and revenue structures and provides estimates of the impact of the RDR and the bans on the platforms‟ profitability.

• The analysis was undertaken for each platform business model with the data collected from market participants for this project in order to illustrate and compare cost structures and

profit ratios. RDR related investment costs are identified and post RDR revenues projected in order to assess indicative impacts of the RDR on profitability across platform models.

The costs of implementing rebate bans have been identified and a post ban analysis has also been undertaken to assess the potential impact of the bans on business profitability. A

sensitivity analysis of the implementation of the bans by platform providers was performed to illustrate the relative importance of underlying assumptions and estimates of the time

required to implement the bans, based on stakeholder interviews and SME review. This analysis is limited by the quality of data provided, which has been reviewed but not validated.

Competition Analysis

• The objective of the Competition Analysis is to provide an overview of the potential competition impacts of banning rebates. The approach to this analysis is based on the guidelines

provided by the Competition Commission (“CC”) with regards to market investigations. However, in this instance, the Competition Analysis does not require a conclusive definition of

economic markets. Instead it is only necessary to identify the principal services and market segments that are affected by the bans in those markets and then to assess a limited set

of competition concerns that may arise as a result of the bans.

• The Competition Analysis, by reviewing the output of the Market Background Analysis, has identified the key market economics, such as vertical and horizontal relationships between

competitors, market structures, market costs, buyer power across the value chain, price structure and levels and substitution with competitors. This initial work allowed the

identification of a range of potential competition/consumer concerns, which follow from the consideration of a number of theories of consumer harm. Further consideration of the key

market economics and of the results of the Business Model Analysis supports the assessment of these potential competition concerns. The Competition Analysis concludes by

describing the possible impacts of implementing the bans on market structure, market behaviours and consumer outcomes. The Competition Analysis carried out in this Report was

independently reviewed by an independent expert in the field of Competition Analysis.

• The Competition Analysis has been supported by Professor Stephen Davies of the University of East Anglia, an expert in competition economics and advisor to Deloitte. Professor

Davies has contributed to the preparation of the competition analysis framework and to the analysis of the results.

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Page 8: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary Market Background

8

The platform market is still at a relatively early stage of its evolution in the UK...

Current platform market overview

• Platforms are playing an increasing role in the retail investment market in the UK. Platforms play two primary roles: administration (arranging and safeguarding assets on behalf of

advisers and customers ) and distribution, bringing together a wide range of retail investments on a single technology based site.

• The FSA has developed a definition of platform services and this definition sets the boundaries within which the proposed platform rules will apply. A number of existing retail

investment providers fall outside of this perimeter – these include providers of Self Invested Personal Pensions (“SIPP”) products (where no other wrappers are offered), life

companies offering life wrappers, discretionary fund managers (“DFMs”), execution only brokers and parts of the Individual Savings Account (“ISA”) manager market. These

providers are defined as part of “adjacent markets” for the purpose of this report, and the proposed bans do not apply to them. But equally some ISA Managers and Execution Only

Brokers are likely to be included within the scope of the bans where, among other things, they provide custodian services, though their scope of services and products is narrower

than for vehicles that are commonly referred to as platforms (for the purpose of this report, these are not defined as part of “adjacent markets)”.

• £229 billion of assets, representing around 16% of total assets in the UK, are currently held on platforms. The rate of growth of assets under administration (“AuA”) on platforms in

recent years has been significant, showing a compound annual growth rate (“CAGR”) of 16% between 2003 and 2011.

Platform business models

• Organisations providing platform services are providing services across an increasing part of the value chain. In addition to the core platform services based around transaction

processing, reporting and administration, platform providers are increasingly providing services „downstream‟ (closer to the point of sale) such as support for advisers in customer

interactions and upstream to „manufacturers‟ of investment funds and products. The platform services provider may also be related through vertical integration both upstream with

product providers (which is more common) and downstream with advisers.

• There are currently a range of differing business models in the platform services market. The main business models - Fund Supermarkets, Wraps, Hybrid and Direct to Customer

(“D2C”) platforms - differ in terms of their charging structures, which reflects their market positioning with respect to funds, advisers and customers.

• There are currently approximately 27 traditional platform participants in the platform services market, with a number of further entries to the platform market imminent or announced

for 2012. The largest three platform services providers account for 48% of the current total platform market in terms of AuA.

Page 9: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary Market Background

9

...and is potentially subject to significant change in the next few years in terms of its size and

structure

The retail investment value chain

• Platforms are centrally positioned within the retail investment value chain and have key interfaces with a number of groups within this value chain, including consumers, advisers and

fund managers / product providers.

• The platform proposition for consumers is the opportunity to manage and monitor combined investments within a single portal. D2C platforms offer the investor a potential access

point to the investment market which is non-advised. However, the D2C platform market segment is still small in relation to the „advised‟ platforms, with around £65 billion AuA at the

end of 2010.

• Platforms offer a range of services to advisers including a collective point of access to products and funds, tools to assist in portfolio selection and planning and administrative

services to support the adviser‟s business and improve its efficiency. Some platforms also play a role in collecting adviser fees.

• Platforms provide services for the supply side of the market assisting fund managers to reach their marketplaces. Platform providers also carry out some administrative services on

behalf of fund managers. Consequently, platforms provide services to both sides of the retail investment market, product providers and advisers/consumers.

• Across the retail investment value chain, on a typical retail share, an Annual Management Charge (“AMC”) of 150 basis points (“bps”) is charged to the customer in respect of the

cost of activities related to the customer‟s investment. For a retail share class with a 150bp AMC, the fund manager will typically retain 75bp and redistribute the remainder to the

platform. Historically, pre RDR, the typical 75bp rebate from the fund includes for advised platforms, the adviser commission (typically 40-50bp) and the platform charge (between 30-

50bp). The platforms, upon receiving the rebate from the fund, will facilitate the payment of the adviser commission to the adviser through the customer‟s cash account and on its

own discretion may make a further rebate to the customer. The level of disclosure to the end customer of the individual components of the 150bp AMC varies by platform business

model.

Page 10: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary Business Model Analysis

10

The Business Model Analysis indicates that many platforms are currently unprofitable

Current platform profitability

• Fund Supermarkets‟ primary source of revenue is from fund rebates (at 75% of their total revenue). Data provided to Deloitte, indicates that Fund Supermarkets have a relatively high

proportion of fixed costs (at an average of 70% of revenue). The average operating margin of the Fund Supermarkets in the sample is negative. This poor average profitability may

be due to a combination of high people costs following the rapid growth of the platforms and their focus on marketing and managing relationships with advisers. [Redacted].

• Non-advised platforms‟ main source of revenue is also given by fund rebates ([redacted]); further important revenues are derived from direct charges to customers. Data provided to

Deloitte indicates a lower proportion of fixed costs than Fund Supermarkets (some 45% of revenue). Low fixed costs and important ancillary /customer revenues appear to drive non-

advised platforms strong profitability, [redacted].

• Wrap platforms are usually smaller than Fund Supermarkets and, in the sample of those who provided financial data, they on average generated nearly 90% of revenues from

customer charges. However they also have relatively high fixed costs (66% of revenue). Despite a high AuA per customer (£105k as compared with £38k for supermarkets), the

Wraps in the sample are currently on average unprofitable with negative margins. [Redacted].

• Hybrid platforms appear fully dependent on fund manager rebates and have a high proportion of fixed costs ([redacted]). As with Wraps, the Hybrids have a high AuA per customer,

[redacted]. They appear also to suffer from high fixed costs and limited diversification of revenue sources.

Implications on charging structures of the rebate bans

• As a result of the ban on fund rebates, platforms (that do not already do so) are expected to start charging customers unbundled charges, while others may need to increase

customer charges to recoup lost revenues. It is therefore expected that the introduction of fund rebate bans will require funds using platforms to which they provide a rebate to

establish a new share class; as an additional share class is likely to be required to reflect the fully unbundled platform charge. If timing allows, it is possible that funds and platforms

would move to create only one additional “unbundled ” share class in response to the both the RDR and the rebate bans. The trend to a small increase in the number of share

classes is consistent with the RDR, which will lead to some funds establishing a new share class (net of adviser commission).

• The number of share classes that may result from these regulatory changes is an important element in platforms‟ profitability, as the costs of introducing and managing a new share

class for a platform do not exhibit any economies of scale, such that managing two share classes in relation to the same fund is for a platform equivalent to managing two funds.

Given the high number of funds typically managed by platforms, if there is a proliferation of share classes these costs would become substantial. The costs of introducing a new

share class for a fund manager are also not insignificant.

• The FSA assumes in PS 10/06 that 2 additional share classes will be needed to comply with the RDR, based on industry consultation. If unit rebates are allowed, this should act to

reduce the number of share classes fund managers choose to offer, and a proliferation of share classes is not expected. In general, funds are expected to offer a small number of

share classes for new investments, possibly around 1 or 2 share classes, to platforms. In some cases, particularly where the platform offers significant distribution opportunities, an

individual platform may seek to obtain a share class specific to its platform, with lower charges. Whether fund managers need to create share classes both to comply with the RDR,

and then separately to comply with the rebate bans, will depend on the timing of policy announcements and commercial preferences. There is therefore uncertainty over the number

of additional share classes the bans may require, with, in one scenario, no additional classes being required, or, in another scenario, around 2 additional share classes being typically

expected to be created by fund managers. If, however, unit rebates are banned, the risk of a proliferation of share classes appears to increase as banning unit rebates might prevent

sufficient price differentiation across different types and scales of customers.

• In conclusion, if unit rebates are allowed, funds and platforms will take into account the extra costs of adding share classes together with competitive advantage of offering a clear

headline price. For this reason it is to be expected that, responding to price pressure, funds may wish to make use of unit rebates alongside their clean share class.

Page 11: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary Business Model Analysis

11

Despite the costs to platforms of implementing the bans, which appear to be in the range of

£0.2m to £20m, depending on their business model, and despite the impact of fixed costs in

their cost structure, platforms have the potential to improve their profitability as a result of

further growth in market AuA Implementation costs of the rebate bans

• The largest cost item that will be incurred as a result of the bans relates to the implementation of unit rebates, which may lead to operational complexities as platforms are required to

change their existing mechanisms through which they pay cash rebates. Some platforms already offer unit rebates while others consider these complexities to be significant.

Stakeholder interviews indicated that the relevant implementation costs are estimated in the range of £500k to £1m for a typical platform. Other costs expected to be incurred by

platforms relate to share class management and other operational costs.

• Platform operators have provided estimations of the costs of implementing the rebate bans. This could include such items as IT system redesign, implementing unit rebates,

launching additional share classes and other operational changes. Total one-off implementation costs for platforms of adapting to the bans as reported in the data responses range

from £0.2m to £4m for an advised platform and from £4m to £20m for a D2C platform. The figure is higher for D2C platforms as these are expected to incur additional costs relative

to other platform business models in developing enhanced customer interfaces in order to ensure that revenue collection from customers replaces current revenue collection from

funds. The estimate of £20m approaches the potential cost of a new entrant in the market, and as such would only be likely to be incurred if substantial system modifications and new

investments were required. Wrap platforms are not significantly impacted by the bans as they already mostly comply. Aside from the „traditional‟ platforms, other types of

organisations (such as Execution-Only Brokers and some ISA Managers) will also need to implement changes to comply with the rules. From the limited number of interviews carried

out, these organisations appear to have currently given less consideration to the changes needed to comply, and the implied costs of these changes.

Indicative profitability post implementation of bans

• The Business Model Analysis considers the impact of these additional costs (in addition to the costs incurred as a result of RDR though excluding any cost of capital) on platforms‟

profitability (EBITDA margin). The analysis assumes further growth of platform AuA post RDR, which is consistent with platforms‟ current relatively low share of total AuM (less than

20%), and that platforms will be able to successfully change the way in which they obtain revenues as a result of the bans. This requires substituting revenues currently gained from

funds to being sourced to a much greater extent from customers. The analysis is also based on the estimates of fixed and variables costs provided by platform operators. These

indicate that fixed costs are relatively high compared to variable costs, but have not been validated by Deloitte.

• [Redacted]. The costs of implementing the bans appear to cost only around 1-2bps per annum over a three year period for a moderate sized platform. Alternatively, if the bps

charges remained unchanged, annual AuA market growth needs to be at least 9.9% in order for all platform business models to break even.

• The conclusions on platform profitability following the implementation of the rebate bans, are dependent on the underlying assumptions and data quality but appears to be sustained

through a number of sensitivities, including allowing for increased market entry.

Page 12: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary Competition Analysis

12

The Competition Analysis concludes that the bans appear to enhance inter-platform

competition...

Inter-platform competition

• Competition between platforms is expected to be enhanced as a result of the bans, principally driven by the increased transparency of unbundled platform charges and given that

continued new entry in the platform market is not expected to be affected by the bans. Entry costs appear to be in the range of £5m to £30m depending on the business model being

pursued and the availability of synergies with the new entrants‟ other businesses. These costs are unlikely to be considered a substantial barrier given the potential scale of the

market and as demonstrated by the continuing market entry.

• In the advised sector, competition between platforms is likely to continue to be driven by the need for platforms to attract the business of advisers by providing services such as

administration, reporting, transaction processing and the facilitation of the payment of adviser charges and access to investment products.

• As a result of the bans, competition is also likely to be driven by advisers having to explain and justify to their customers the unbundled platform and fund charges alongside their own

charges. This may be expected to lead to a range of different platform offerings covering a number of price/quality trade-offs for advisers and their customers. As the fund rebate is

likely to lead to more explicit and transparent platform charges, this increased price transparency, by exposing advisers to increased pressure from customers, incentivises and

allows advisers to exercise increased pressure on both funds and platforms. This is because it is assumed that advisers will need to justify the platforms‟ unbundled charges to

customers in the context of their advice, and their platform recommendation based on comparing the unbundled prices and services of different platforms. Notwithstanding the

introduction of MiFiD, this is expected to be facilitated by the introduction of unbundled platform charges.

• The assumptions on the changes in the pricing sensitivity of advisers (and of customers in non advised markets) represent a key element of the competition analysis as the changes

in pricing sensitivity are assumed to drive advisers‟ behaviours and the pricing pressure they will exercise relative to platforms and funds. The assumptions made on the issue of

price sensitivity in this report are based on the following: NMG consumer research indicating that many customers appear to believe that increased transparency over charges

(resulting from the bans and RDR) would facilitate more concern over costs and would drive increased competition; the interviews undertaken as part of this project as well as

discussions with market experts that have indicated that market participants maintain the view that enhanced transparency over charges will change consumers‟ behaviours by

increasing their price sensitivity and, hence, are expected to increase the price pressure that they will apply to advisers or platforms; and general propositions from economic theory

and analysis which suggest that enhanced price transparency is likely to lead to better informed consumers and to increased price competition. However, it remains to be determined

whether consumers will act in this way, but on the basis of this evidence this assumption has been made in this report.

• Recent consumer research suggests that, in the advised sector, customers have to date been dependent upon advisers for platform selection and that there is a low level of

awareness of platform charges. In the non-advised sector, some current platform services may be perceived to be „free‟ as a result of fund rebates. However most customers appear

to believe that increased transparency over charges (resulting from the bans and RDR) would facilitate more concern over costs and would drive increased competition. This is

supportive of the proposition (above) that advisers will be price sensitive on behalf of their customers and that customers in D2C markets will also seek to apply price pressure.

• It is possible that platforms may seek to introduce complex pricing structures in order to limit the transparency of their charges. These countervailing actions may generate additional

costs for fund managers and platforms (for example if obfuscation takes the form of multiple share classes) and are likely to be countered by obligations on advisers imposed by the

RDR and to be mitigated by market entry and increases in competition levels, providing opportunities for commercial offerings based on “transparent charging”. The ability of advisers

to switch between platforms at relatively lower costs than in the current environment (as a result of proposed new regulations seeking to simplify the platform re-registration process)

and the advisers‟ requirement to explain their charges to their customers may also counter-balance to some extent the risk of this occurrence.

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Executive Summary Competition Analysis

13

The Competition Analysis concludes that the bans appear to enhance inter-fund competition

and inter-adviser competition...

Inter-fund competition

• Competition between funds may also be enhanced as a result of the bans. Platforms are not expected to foreclose access to platforms for funds to any significant extent given the

demands of advisers for access to funds to serve their consumers. Moreover, the interview programme has confirmed that the marginal cost for platforms of admitting and holding a

fund on the platform is relatively small (especially where it belongs to a fund management company with whom the platform already has an established relationship). The bans may

reinforce existing trends to vertical integration in the market, but this is in part a defensive strategy on the part of the funds to preserve a route to market and their existing margins,

and is not necessarily intended to support higher prices for the integrated entity or aimed at excluding funds.

• At the same time, the ban on fund rebates will introduce increased transparency on funds‟ charges through unbundled „clean‟ share classes. As explained above, the relative price of

funds will become increasingly important to advisers in their fund selection post RDR and with the further increase in price transparency following the implementation of the bans.

This is likely to lead to increased price competition between funds.

Inter-adviser competition

• Competition between advisers may be enhanced given that increased transparency over platform and fund charges as a result of the bans will place some increased pressure on

advisers to explain and justify to their customers these charges in the context of their own charges. However this increase in competition is principally an effect of RDR as opposed to

the rebate bans, but the bans do not appear to affect this trend.

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Executive Summary Competition Analysis

14

...but may raise the costs for platforms relative to adjacent markets

Adjacent market competition

• The adjacent markets identified in this report offer products that are also available on platforms. They are differentiated because the additional services offered by platforms to

advisers and customers are more extensive than in these other markets.

• Competition between products distributed through platforms and products distributed in adjacent markets is affected because the bans do not apply to vehicles in adjacent markets

and result in some cost increases for platforms. However, these cost increases are expected to be relatively modest given market growth and fixed cost assumptions. The Business

Modelling Analysis suggests that the costs to platforms of implementing the bans is in the order of 1 to 2bps per year for an advised platform when assuming a cost recovery over

three years. D2C platforms, where these costs may be more significant as a result of the changes required in their business model, could suffer from increased costs relative to

adjacent markets more than advised platforms.

• It is possible that, after the bans, when selecting which investment vehicle to employ for their investment decision, some customers may prefer the bundled pricing that will remain on

offer in the adjacent markets as opposed to the unbundled price for platforms. This may be because the bundled price is less than the sum of the unbundled charges or because they

prefer the simplicity of bundled charging. However, in the advised sector, it is expected that advisers, given the value of services provided by platforms to advisers, will seek to

support purchasing through platforms.

• D2C platforms will need to justify an unbundled price by demonstrating value more openly and explicitly than in the current and post RDR world. This could lead to increased

customer awareness which, combined with the facility offered by platforms to customers to manage their investment decisions using a single tool, may mitigate to some extent but

not entirely the price sensitivity effect. Increased price awareness may also lead customers to consider whether they value the extra services provided by platforms. In those

instances where they do not value these services, they may switch to adjacent markets. However, if this were the case, this would appear to be the result of beneficial competition as

opposed to a distortion in competition arising from the bans.

• As such, the extent to which customers and advisers switch away from platforms and towards adjacent markets will in practice be a function of the ability of platforms to establish

attractive purchasing opportunities for their customers. This would tend to imply that the bans do not distort competition in favour of adjacent markets but rather facilitate overall

competition. However some advisers and consumers may favour adjacent markets purely on the basis of the „simplicity‟ of their charges by virtue of being bundled.

Customer benefits

• As a result of the bans, customers are expected to benefit from transparency and enhanced competition driving improved service quality and more competitive pricing levels in the

market. These prices will need to reflect changes to the cost of compliance with the bans.

• The flow-through of benefits to consumers may be adversely impacted by the vertical integration of funds and platforms seeking to exercise a degree of countervailing power against

advisers and customers. But the extent of this potential adverse impact is limited by a combination of increased pressure on advisers following RDR to explain and justify their own

and associated fees to consumers, consumer price sensitivity, inter-platform competition and lower switching costs. Together these factors mean that advisers seeking to obtain the

„best deal‟ for their customers will be able to exercise choice over platforms – there will be sufficient platforms in the market given the inter-platform competition described above –

and hence are expected to be able to exercise influence over the quality and price of platforms‟ offerings.

• The potential for adviser and platform bias that can be created by the existence of fund manager and cash rebates would also be removed if the rebates are banned.

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Executive Summary Conclusions

15

In conclusion, the analysis carried out in this report suggests that the bans are unlikely to

change the platform market structure but do affect market behaviours especially through

changes in pricing transparency and structures...

Platform market structure

• The platform market is currently experiencing rapid growth and a high level of new entry, mostly by upstream product providers moving downstream through the creation of their own

platform propositions. This trend is expected to continue given adviser demands for access to platforms and the set-up costs relative to the scale of the market opportunity.

• Moreover, further growth of AuA on platforms will support increased levels of platform profitability (which for some platforms is currently at a low level) due to fixed costs in the

platform cost structure. This is despite cost increases that will occur with the introduction of the bans on rebates.

• However, D2C platforms may face a significant challenge to their current business model: the bans require the development of enhanced customer interfaces in order to ensure that

revenue collection from customers replaces current revenue collection from funds. Nevertheless, a number of the current advised platform businesses are looking at expanding into

the D2C market and there are currently only a small number of D2C platforms.

• With regards to the likely future market structure, current trends in market growth and new entry combined with the stated preferences of some advisers suggest that in the future

there may be a small number of large platforms constituting primary platforms for advisers (consistent with advisers‟ approach to platform selection) together with a larger number of

smaller platforms. Most advisers are expected each to use 2 to 4 platforms, covering different customer requirements, with a primary platform accounting for the majority of their

customers‟ on-platform assets. The larger number of smaller scale platforms may constitute more specialist offerings of platforms (in terms of services or product selection) or further

vertical integration by upstream product providers wanting to preserve a route to market or otherwise promote their market positioning. This possible future market structure is

consistent with experience in other countries such as Australia.

• Except for Wraps, most advised platform operators have indicated that they may require between 12 and 18 months to implement operational changes and transform their business

model to comply with rebate bans requirements. They have noted that in addition to the RDR, several other regulatory reforms are currently taking place (such as Mifid 2, Solvency 2,

Basel 3, IFRS 9, etc), leading to a potential lack of resources within organisations to manage additional internal projects. Wraps facing less costs of implementation require less time.

The sample non-advised platform has indicated that it may need up to 4 years to fully transform its business model depending on the scope of IT changes that are deemed

necessary. However, we note that new entrants are able to bring new platform propositions to market in considerably less time than this and in practice the transformation may well

be possible in less than the outside limit of 4 years.

Market behaviours

• Competition between platforms is expected to be enhanced given the increased transparency of platform charges (which will follow from the rebate bans), continued new entry

(referred to above) and increasing pressure on unbundled platform prices from advisers. It is possible that platforms may seek to introduce complex pricing structures in order to limit

the transparency of their charges, but this may generate additional costs for fund managers and platforms and is likely to be countered by obligations on advisers imposed by the

RDR and by market entry and an associated increase in competition levels.

• Competition between funds is expected to continue and may be enhanced. This is because platforms are not expected to seek to significantly reduce the number of funds on

platforms given the demands of advisers for access to specific funds to serve their consumers, and the ban on fund rebates will introduce increased transparency on funds‟ charges

through „clean‟ share classes. Similarly, competition between advisers may be enhanced given that increased transparency over platform and fund charges as a result of the bans

will place some increased pressure on advisers to explain and justify to their customers these charges in the context of their own charges.

• Competition between products distributed through platforms and products in adjacent markets is potentially affected because the bans do not apply to these providers and may result

in cost increases for platforms. More price sensitive customers may prefer the bundled pricing that will remain on offer in the adjacent markets, as this is likely to continue to reflect

the fund rebates obtained from funds, where these exist. However this impact may be mitigated to some extent for advised consumers and potentially for some D2C customers,

given the value of services provided by platforms to advisers and customers.

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Executive Summary Conclusions

16

... and appear likely to enhance the positive consumer outcomes of the RDR

Consumer impact

• Given the impact on competition (described above), the impact on consumers of the rebate bans is expected to be beneficial overall: investment choice is not likely to be reduced,

service quality from platforms is likely to be better adapted to customers‟ willingness to pay, and increased transparency over fund, platform and adviser charges is expected to

encourage improved pricing.

• The flow-through of benefits to consumers may be impacted by the increasing trends to vertical integration of funds and platforms, however this is in part a defensive strategy on the

part of fund managers and product providers to preserve a route to market and their existing profit margins. The flow-through of benefits to consumers may also be impacted by

pricing strategies that may be designed to limit price transparency. The extent of this potential adverse impact is limited by additional costs for fund managers and platforms that

these strategies may generate, increased pressure on advisers following RDR to explain and justify their own and other fees in the retail investment chain to consumers, increased

consumer price sensitivity, and continued inter-platform competition.

• Finally, unit rebates are likely to be beneficial overall to consumers relative to a situation where neither cash nor unit rebates are allowed. Unit rebates mitigate the risk of a

proliferation of share classes which are costly to platforms and fund managers and which raise switching costs for customers seeking to move between platforms. Moreover unit

rebates, in the absence of a proliferation of share classes, provide a mechanism for funds to discount to consumers below a uniform share class and allow platforms to exercise

competitive pressure on funds on behalf of consumers and advisers. Unit rebates are to be preferred to cash rebates since they mitigate against advisers obscuring the separate

presentation of adviser, platform and fund charges. For these reasons it is to be expected that, responding to price pressure, funds may wish to make use of unit rebates alongside

their clean share class

These findings have been reached on the basis of the analysis and evidence explained in the Market Background, Business Model Analysis and Competition Analysis sections of the

report.

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The findings of this report are subject to a range of limitations. These should be taken into

account when considering these findings and overall conclusions

Executive Summary Methodology and approach – Limitations

The findings contained in this Report are subject to a number of important limitations.

Scope of work

• The findings presented in this report need to be interpreted with some care and with due review of the underlying assumptions and propositions. This is because it seeks to assess

the impact of proposed regulatory changes not on the existing market but on the post RDR market of which there is as yet no direct experience.

• The analysis for the Report was carried out over a nine week period during October to December 2011 in accordance with the reporting requirements to the FSA.

• The level of detail and depth of many activities within the project, including data collection, data validation, the programme of stakeholder interviews and the programme of analytical

activities has been scoped based on the time available to undertake and complete the Report.

Data constraints

• Data sourced from public information sources has not been validated.

• Data provided by the 8 platform providers receiving the data template as part of the Business Modelling Analysis has not been validated. Some requests for clarification were made

to these platform providers, and responses were received in some cases.

• Hybrid and Non-Advised business models are each only represented by one sample platform in the Business Modelling Analysis.

• In some areas where data was requested (for example in relation to costs of implementing the rebate bans), some organisations experienced difficulty in estimating these costs.

Some organisations were unable to break down estimates of one-off and ongoing costs into component parts.

• In particular, where organisations are captured by the platform rules, but are not traditionally considered platforms, the organisations approached were generally not able to provide

the data requested.

• Data cleaning and the application of assumptions were required in relation to some of the data submitted by platform providers. A list of the key assumptions is provided in the

template.

17

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Introduction

18

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Appendices 179

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Introduction

19

Background

The regulatory treatment of platform services is viewed as having a potentially important

contribution to achieving the objectives of the RDR

Background to the Report

• The Retail Distribution Review (“RDR”) is due to come into force on January 1st 2013. This regulation will change the way retail investment products are distributed to

customers.

• The key changes that implement the RDR rules will include the removal of adviser commission and the introduction of adviser charging, the introduction of new

requirements for professional qualifications for advisers and clarification of the status of advisers and the requirements for independent status.

• The FSA has long considered that the regulatory treatment of retail investment platforms should be considered in tandem with the wider RDR proposals, and that the

regulatory treatment of and framework for platforms has a potentially important role to play in ensuring that the overall objectives of the RDR are achieved.

• The objective of the FSA is to move to a situation where there will be a ban on platforms being funded by rebates and a ban on rebates in cash to consumers.

• Platforms will still be able to get payments from fund managers and product providers but will be forced to pass them onto customers in their entirety in the form of

additional units

• The Policy Statement (PS11/9) on 1 August 2011 set out a clear intention to ban rebates, however no deadline was included in the Policy Statement as further work

was required to ensure the transition is in the best interest of consumers and to analyse risks of adverse consequences

• The FSA therefore requested Deloitte‟s assistance to help them answer the following questions:

What is the appropriate timescale to implement the bans?

What are the implementation details for changes?

What are the overall implications for consumers?

Are there any potential adverse consequences following a ban of rebates?

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The purpose of this Report is to assess the potential impact of banning rebates to platforms by

fund managers, and cash rebates to consumers, both through the Business Model and

Competition Analysis outlined in this Report

Objectives of this Report

• The overall purpose of the Deloitte work, contained in this Report, is to provide the FSA with an overview of the potential impact of banning rebates, particularly on

consumers and on competition within the wider retail investment market. It also aims to help the FSA to form a view on the appropriate timing for introduction of the

changes. This is achieved in this Report through the Business Model Analysis and Competition Analysis, the scope of which is set out below.

• The scope of the Business Model Analysis covers:

Analysis of the platform market characteristics and business models;

Analysis of the retail investment distribution and administration value chain, showing the position of platform providers and providers in adjacent sectors within

this;

Analysis of the relative market power of these providers, against RDR scenarios;

Identification of revenue streams for different types of platforms to understand how they generate revenue;

Analysis of the financial performance of a sample of platform providers;

Analysis of changes that took place in the Australian and US market and assess what we can learn from international comparison; and

Identification of the high level cost implications of implementing the proposed bans, and provide guidance on reasonable timeframes for firms to implement the

required changes.

• The scope of the Competition Analysis covers:

The analysis of key competition dynamics of the platform services providers, including barriers to entry and exit;

The assessment of competition between platforms and between platforms and similar offerings in adjacent markets, and risks of market distortions;

The assessment of the impact of the rebates bans on overall consumers‟ benefits, especially through price and access;

The analysis of the impact of the proposal on the level of services offered across the value chain; and

The identification of any differences between advised and non-advised platform markets evolution.

.

Introduction Report Objectives

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Approach and Methodology

21

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Appendices 179

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

The approach to analysing the impact of rebate bans in this report is through Business Model

Analysis and Competition Analysis based on an assessment of the Market Background

Development of value chain for platform service providers

• 4 main platform business models were selected for analysis.

These comprise:

‒ Fund supermarket

‒ Wrap

‒ Hybrid

‒ Non-advised

Identified key market issues based on Market Background and Business

Models

• Further consideration of the assessment of Market Background and

Business modeling supports the identification and discussion of a number

of key market issues.

• The understanding of these key market is then used to evaluate whether

the identified hypotheses may hold or not and so whether the identified

concerns may hold or not.

Assessment of overall competition/consumer

impacts

• The Competition Analysis concludes by describing

the possible impacts of implementing the bans for

each competition/consumer concern

• The overall impacts on consumers, competition and

the market are set out.

Identify possible competition concerns resulting from the bans

• Initial work is focussed on reviewing the output from the Market

Background assessment; this includes identifying competing

products, competitor groups and vertical and horizontal

relationships of competitors

• This initial work allows the identification of a range of potential

competition/consumer concerns which may follow from the

consideration of a number of theories of consumer harm.

Hypotheses relating to market conditions that support or refute

these concerns are set out.

22

1. Market background. The economics of the industry were modelled by identifying the market value chain, understanding business strategies and expected business impacts of RDR

and rebate bans

3. Competition Analysis. The Competition Analysis adopted a conventional approach to market analysis to assess possible impact of the bans on market structure, market behaviours

and consumers.

Market data was collected and analysed to inform the Market Background, Business Model Analysis and Competition Analysis

International benchmarks

• Data and views were collected on the Australian

and US platform market through desk research and

interviews with SMEs

Collected UK platforms‟ financial data

• FY2010 financial data and RDR and rebate related costs

data was collected via questionnaires from 8 platforms. The

data sample comprised:

3 fund supermarket platforms

3 wrap platforms

1 hybrid platform

1 non-advised platform

Platform market stakeholder interviews

Interviews were carried out with 21 platforms and stakeholders across the

value chain to understand their current business and strategy, as well as

expected impacts of RDR and rebate bans on their business. The interview

sample comprised

• 9 platforms

• 2 fund managers

• 2 life companies

• 2 advisers

• Representatives from SIPP provider, ISAs managers, Execution Only

brokers, DFM and an industry expert

2. Business Model Analysis. This section analysed costs and revenue structures per business model and assessed the impact of the RDR and the bans on the platforms’ KPIs

Identified of platforms‟ revenue and cost structures

• Performed analysis of each platform business model to illustrate and

compare cost structure, profit ratio and operational KPIs

• Identified of RDR related investment and post RDR analysis to identify

impacts on profitability

• Identified of rebate ban related investments and performed post ban

analysis to identify the key challenges to implementing the bans, impact

of the ban on business profitability, and implications of timing of the ban

Reviewed results and sensitivity analysis

• Challenged and review key financials, market and

operational assumptions

• Refined model output, including timing of bans

Approach and Methodology Project Approach

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

• High-level description of services provided by

platforms

• Overview of the retail investment value chain

• Platform market growth and participants within the

platform market

• Identification of key business models

• Understanding of revenue and charging models

• Understanding how rebates are facilitated

currently

• Overview of key platform stakeholders in the retail

investment market

• Behaviour of stakeholders with respect to platform

usage

• Understand the different revenue and charging models for creation of the indicative

business models-> Business Model Analysis

• Understand how the AMC is divided between parties and how rebates are facilitated -

> Business Model Analysis

• Analyse of firms‟ behaviour to assist in assessing overall market competitiveness ->

Competition Analysis

• Understand the nature and level of switching costs and whether they limit competition

in the current market -> Competition Analysis

• Understand the current balance of power and the nature of the relationships between

stakeholders to test if the bans will alter this dynamic -> Competition Analysis

• Understand the potential for demand/supply-side substitutability of adjacent markets

–> Competition Analysis

• Identify other participants who may be impacted by the bans -> Business Model

Analysis

• Identification and description of adjacent markets

• Understand the key services provided by platform to different stakeholders and how

platforms are remunerated for these services -> Business Model Analysis

• Understand the growth in the number of new entrants and whether there are any

significant barriers to entry -> Competition Analysis

• Identify key players to ensure the interview programme and data gathered is

representative of the market -> Business Model Analysis

• Understand the current levels of vertical integration -> Competition Analysis

Areas Key elements Link to the analysis

The Market Background section provides insight on the current state of the platform market

and its stakeholders (pre-RDR) to support the Business Model and Competition Analysis

Platform Market

Characteristics

Key Platform

Stakeholders

Adjacent Markets

Platform Business

Models

The Market Background section is based primarily on secondary research sources and was supplemented by the programme of interviews conducted as part of the

project. The key areas that are explored in the section are outlined below, including how they link into the subsequent Business Model Analysis and Competition Analysis.

Approach and Methodology Market background

23

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• The data collection helped us identify platform

revenue and costs structure and establish

market assumptions

• Analysis for each platform business model was

undertaken to illustrate and compare their cost

structures, profit ratios and operational KPIs

• RDR related costs were identified and analysed

to identify impacts on profitability

• Rebate ban costs were identified and post ban

analysis carried out to identify the key

challenges to implementing the bans, impact of

the ban on business profitability, and the

implications of timing of the ban

• Key financials, market and operational

assumptions were challenged and reviewed

• The model output was refined

2. Impact modeling and hypothesis testing 3. Result validation 1. Data collection

• A data template for collecting information was

developed and agreed with the FSA

• FY2010 financial data and RDR and rebate

related costs data were collected via the template

from 8 platforms representing a range of platform

business models

• Requests to complete the data template were

sent to:

• 3 fund supermarkets

• 3 wraps

• 1 hybrid

• 1 non-advised platform

Fund supermarket Wrap Hybrid Non-advised

Number of platforms 3 3 1 1

Average AuA per platform (£bn) 21 4

[Redacted] Average revenue per platform (£m) 69 43

Average number of customers per

platform (,000) 548 48

Business model analysis sample overview

Business Model Analysis

A three-step approach was developed and followed to carry out the Business Model Analysis

Approach and Methodology

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A framework was developed for the Competition Analysis that focuses on the impact of the

bans on market structure, stakeholder behaviours and on a number of competition/consumer

concerns

• The objective of the Competition Analysis is to provide the FSA with an overview of the

potential competition impacts of banning rebates.

• The approach to this analysis is based on the guidelines provided by the Competition

Commission with regards to market investigations.

• However, in this instance, the Competition Analysis does not require a conclusive

definition of economic markets (as per the CC framework). Instead it is only necessary

to identify the principal services and market segments that are affected by the bans in

those markets and then to assess a limited set of competition concerns that may arise

as a result of the bans. As such, the approach does not involve the same level of detail

as the CC‟s.

• The approach to the competition analysis is structured into four stages:

1. Identification of Key Market Economics. Existing vertical and horizontal

relationships are considered, and assumptions of how markets will behave in a

post RDR world without the bans(„the counterfactual‟) and in a post Bans world

are made.

2. Develop competition concerns. Hypotheses on possible competition and

consumer concerns that may materialise as a result of the bans are developed.

3. Evaluate the hypotheses. Using outcomes from the market and business

modelling analysis, as well as an analysis of the key market issues, the

hypotheses are evaluated.

4. Assessing overall impact. Overall competition impacts of the bans on market

structure, market behaviours and consumer/competition outcomes as a result of

the bans are assessed.

• The Competition Analysis has been supported by Prof. Stephen Davies of the

University of East Anglia, an expert in competition economics. Prof. Davies has

contributed to the preparation of competition analysis framework and to the analysis of

the results.

• The Competition Analysis framework is presented in more detail in Appendix C to this

report.

Approach for Competition Analysis

Identification o Key Market Economics

STAGE 1

Develop competition concerns

STAGE 2

Evaluate the hypotheses

STAGE 3

STAGE 4

Assessing overall impact

• Identify vertical and horizontal relationships within the

platform market and competitors

• Identify cost structures within the platform market

• Identify stakeholders‟ behaviours in the market for a post

RDR and a post Bans scenario

• Identify competing products and competitor groups

(“adjacent markets”)

• Review the theories of consumer harm and apply them to

the platform market

• Identify the most important areas of concern for

competition/consumer harm that the bans could create

• Describe what market conditions – the hypotheses - would

need to hold so that the competition concerns would arise

• Identify business drivers and indicators (for both the post

RDR and post Bans scenarios) to test and evaluate the

hypotheses

• Assess whether the possible competition concerns are likely

to arise as a result of the bans or whether the bans will lead

to benefits for competition and consumers

• Overall weighing of impacts for each competition/ consumer

concern

• Analysis of overall impacts for consumers, competition and

the market

Approach and Methodology Competition Analysis

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Possible competition concerns resulting from the bans have been identified: the Competition

Analysis tests for the validity of these concerns

Identification of Key Market

Economics

Advisers‟ platform selection

criteria

Stakeholders‟ behaviour

Theories of Harm

Elimination of competition

1. Foreclosure

2. Raising rivals‟ costs

3. Lowering rivals‟ benefit

4. Leveraging market power

5. Protecting market power

6. Deterring entry

7. Denying network effects or scale to a rival

Foreclosure of access to platforms for funds

Consumer choice of investment opportunities is

limited

Distortion of competition by raising fees for

customers

Distortion of competition by reducing revenue /

raising costs for platforms relative to adjacent

markets

Barriers to entry lead to limitations to platform

/horizontal competition resulting in pricing abuses

Market costs and business

models

Market entry

Specification of competition/consumer concern

Price setting practices

Adjacent markets / outside

market

Tacit collusion / coordinated effects

Abuse of dominance

Quality reduction

• Reduction of quality of service

• Reduction of choice

• Increase of pricing complexity / Decrease in pricing

transparency

Impacts on:

Consumers

Advisers

Platforms

Funds

Adjacent players

Quality of service to advisers and consumers is

adversely affected

• A review of the theories of consumer harm has indicated areas where economic theory identifies potential negative consumer impacts as a result of competition distortions.

• Based on the Identification of Key Market Economics, relevant theories of harm have been applied to the impact of the bans on the platform market and six possible competition “concerns” have

been developed.

• For each concern, a set of hypotheses that could either support or contradict the materialisation of the concern as a result of the bans has been identified.

• The strengths and weaknesses of these hypotheses are assessed in order to form an overall assessment of each concern.

• The concerns set out in the table below are explained in more detail in the Competition Analysis section of this report.

Approach and Methodology Competition Analysis

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Using the results of the market and business modelling analysis and based on the key market

issues that have emerged, the hypotheses and concerns arising as a result of the bans have been

assessed and tested for validity

• To test and evaluate the concerns and the supporting/contradicting hypotheses for the

materialisation of the concerns, the key market issues and market behaviours developed

in conjunction with the market analysis exercise and the business modelling exercise

have been employed.

• Five key market issues define the scope of the competition analysis. These include:

advisers‟ platform selection criteria; platform market costs; entry in the platform market;

platform pricing structure and levels; and product/demand substitution with adjacent

markets.

• The stakeholders‟ market behaviours are developed to reflect the analysis of the market

under a post RDR (counterfactual) and a post Bans scenario. These behaviours and their

changes in a post Bans scenario are analysed for the platform market participants across

the value chain as well as for adjacent markets.

• Both the key market issues and the market behaviours are also based on data obtained

from market research, data requests submitted by the FSA to operators and by the

business model analysis.

• For each concern, the analysis of the contradicting and supporting hypotheses leads to a

qualitative assessment of the factors that may contribute to increase the concern as a

result of the ban.

• The assessment is done with reference to each of the market participants across the

value chain to ensure that the Post bans competition risks are evaluated in the whole.

• This leads to an overall assessment of whether a possible competition concern is likely to

arise as a result of the bans or whether the bans will lead to benefits for competition and

consumers.

• Finally, the key findings of analysis of the concerns are presented in the from of

conclusions on the impact of the bans on market structure (entry, horizontal competition,

vertical integration), on the behaviours of the market players (costs, price setting

practices, buyer power across the value chain) and competition and consumer outcomes

(investment choice, service quality, prices).

Key market issues

Advisers‟ platform selection criteria

Substitution with adjacent markets

Entry in the platform market

Platforms‟ pricing structure and

levels

Platform costs

Market behaviours post RDR

and post Bans

Platforms

Advisers

Consumers

Fund Managers

Qualitative assessment of competition concerns

Conclusions on overall impact of the bans on:

Market structure

Market behaviours

Competition/consumer outcomes

Evaluation of hypotheses

Approach and Methodology Competition Analysis

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Market Background

28

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Platform Market Overview 30

Business Models 41

Key Platform Stakeholders 52

Adjacent Markets 68

International Case Studies 76

Business Model Analysis 84

Competition Analysis 128

Appendices 179

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Market Background

29

The Market Background section provides an overview of the retail investment value chain

including the role of platforms and describes the nature of platform business models

Contents of Market Background Section

Sub-section Description of key analysis

Platform Market

Overview

Key Platform

Stakeholders

Adjacent Markets

Platform Business

Models

• FSA platform definition

• High-level description of services provided by platforms

• Overview of retail investment value chain

• Retail investment market AuM and sales by distribution channels

• Platform market growth and participants within the platform market

• Key strategies

• Revenue sources, charging structure, product offering and other characteristics of different platform business models

• Current ability to facilitate customer rebates (via either units or cash)

• Platform financial performance across platform business models

• Overview of key platform stakeholders in the retail investment market

‒ Fund market overview and interaction with platform market

‒ Role of Discretionary Fund Managers (“DFMs”) and interaction with advisers and platforms

‒ Adviser market overview and interaction with platform market

‒ Customers and interaction with platform market

• Identification and definition of adjacent markets

• Understanding the potential for substitution of adjacent market products/services with those of platforms

Introduction

The Market Background section seeks to outline the historical and current position of platforms in the retail market, and their role relative to other market stakeholders.

It also introduces the types of business model that form the basis of the Business Model Analysis.

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Platform Market Overview Market Background

30

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Platform Market Overview 30

Business Models 41

Key Platform Stakeholders 52

Adjacent Markets 68

International Case Studies 76

Business Model Analysis 84

Competition Analysis 128

Appendices 179

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Market Background

31

A platform service has been redefined in FSA CP 10/29. In practice, platform services

comprises web-based portals which customers and advisers can use to execute, hold and

monitor their retail investments

• In its Policy Statement 11/9, the FSA proposes a new definition of platform

service and platform service provider:

• “A platform service provider is defined as a firm providing a platform

service”

• “A platform service is defined as a service which:

involves arranging and safeguarding and administering assets; and

distributes retail investment products which are offered to retail clients

by more than one product provider;

but is neither:

solely paid for by adviser charges; nor

ancillary to the activity of managing investments for the retail client

• The investment vehicles that the FSA has indicated are caught in this

definition include execution only brokers (that offer clients custodian

services); and ISA Managers (that distribute funds from more than one

provider)

FSA definition

• In practice. platforms comprise a web-based portal which can be

accessed by either customers or advisers to execute investment

transactions. The platform then holds the investments in a single location

which allows them to review investment performance across the portfolio.

• Platforms host a wide range of products and allow customers to purchase

them on a wrapped or unwrapped basis. This means that they can be held

separately or held within a tax efficient wrapper. Common tax wrappers

include SIPPs, ISAs and insurance bonds.

• Typical products available for customers include:

‒ Direct mutual funds (such as a Unit Trust or OEIC),

‒ Investment trusts;

‒ Individual equities;

‒ Corporate bonds;

‒ Cash;

‒ Exchange Traded Funds (“ETFs”);

‒ Venture Capital Trusts (“VCTs”);

‒ Hedge funds; and

‒ Gilts.

• Products are often available from multiple fund management providers,

platforms can have as many as 8,500 funds from hundreds of fund

managers. The extent of the range of products available varies by

platform type; this will be discussed later in the section.

Application of FSA definition

The definition of a platform service provider sets the basis by which businesses are captured by the proposed bans. However this definition includes a small number

of businesses which do not fall in the definition of a platform that is commonly used in the market. Therefore the majority of external data featured in the Market

Background section relates to the market definition of a platform rather than the FSA definition of a „platform service provider‟.

Platform Market Overview

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Access to a large customer base

Reduced administration as all the investment trades made by

customers on a particular platform for an individual fund are aggregated

into one transaction in one nominee account for the purposes of

processing

Reduced paperwork and administration as opposed to off-platform,

where different application forms, separate payments, different client

statements and portfolio valuations are usually needed for each

investment

Single view of individual customer‟s investment portfolios and

performance as well as assets aggregated across the whole of the

advisers client base

The ability to use model portfolios for customers

Direct access to its adviser remuneration

Single view of investments with online access to reporting when

required

Reduction in paperwork received

Use of cash account on the platform reduces the amount of cheques

that need to be written to cover adviser fees and platform charges

Access to investment tools (on a D2C platform)

Market Background

32

Platforms are marketed in terms of providing benefit to customers, but they also provide

significant benefits to both advisers and fund managers

Platform Market Overview

Advisers

Customers

Provision of administrative services

Execution of transactions

Provision of product information

Custody for clients‟ assets

Facilitation of adviser remuneration

Overview and management of clients‟ investments

online

Provision of investment tools (risk profiling, asset

allocation, planning, etc)

Back-office administration services, invoicing,

reconciliation

Fund managers

• Platforms benefit customers because they provide a single point of access to a customer's retail investment portfolio (where the assets are bought on-platform).

Customers can either purchase assets directly via a direct to consumer (“D2C”) platform or their adviser can purchases assets on their behalf via an advised

platform. In an advised platform, the adviser will often be the key user of the platform.

• Although platforms are marketed in terms of customer benefits, using a platform has benefits to both advisers and fund managers. Advisers and fund managers

gain from the aggregation of the transactions and centralised administration.

Services offered by platforms Benefits to the stakeholder

Page 33: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Administration and Processing Distribution Investment management

Fund trading

Strategic asset

allocation

Regulatory compliance

Client reporting across all needs

Fund admin

Trade execution

Manage client Client

reporting Investment accounting

Price movement

tracking

Practice management

Customer relationship

management

Performance management

Manage product

Data validation & oversight

Fund accounting

Order management

Instruction handling &

management

Product provider interface

Investment operations

Valuations Transfer agency

Charges / rebates

Adviser remuneration

Fund accounting

Financial data / unit price

feeds

Client money management

Withdrawals / Distribution / Settlement

Reporting Custody

/safekeeping

Nominee holdings

reconciliation

Corporate actions

processing

Sales & marketing

Adviser back office

Transaction processing

Client and account admin

Advice Reporting Admin

Deal aggregation

Wrap portal

Cash management

Investment operations

Commission

Manage

positions

Transfer/Re-registration

Fact Find

Risk Profiling

Financial Planning

Suitability

Investment compliance

Retail investment value chain

Platforms act in the middle of the retail investment value chain, primarily providing

transaction processing, reporting and administration services, acting as the interface between

the customer/adviser and the fund manager

33

Market Background Platform Market Overview – Role in the Value Chain

Typical platform services (details of

which are provided on the following

pages)

The diagram below highlights the individual activities that are undertaken across the retail investment value chain. The boxes shaded in grey highlight the activities

which can be typically conducted by a platform. The individual footprint of activities undertaken by a specific platform will vary depending on the business model it

operates.

In contrast, where business is conducted off-platform, then the majority of the activities in the grey boxes (shown in the diagram below) are performed by the fund

manager (although they typically outsource these activities to a third party administrator (“TPA”) or asset servicing company such as Bank of New York Mellon and

International Financial Data Services (“IFDS”)) or the product provider e.g. Life insurer, SIPP provider or ISA manager.

Regulatory monitoring

Investment research

Packaging

Performance management

Portfolio performance

Investment assembly

Tax wrapper admin

Tax credits /

reclamation

Taxation reporting

Model portfolio data

Page 34: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

34

Key Platform Stakeholders – Services Breakdown

Price movement tracking

Instruction handling & management

Charges / rebates

Withdrawals / Distribution / Settlement

Corporate actions processing

Transaction processing

Deal aggregation

Transfer/Re-registration

Investment compliance

• Assisting with the movement of

funds from one platform to

another (or off-platform)

• Tracking of daily find prices

• Handling of the adviser/client

transaction requests to be

passed onto the fund manager

or their TPA • Processing of customer rebates

and facilitation of adviser

charging

• Removal of investments and

distribution of returns

• Notifying customers of corporate

actions and executing the

consequences when required

• Aggregating all the individual

customer trades into one single

transaction for processing

• Compliance with investment

regulations

Regulatory monitoring Investment research

Packaging

Performance management

Portfolio performance

Investment assembly Tax wrapper admin

Tax credits / reclamation

Taxation reporting

Model portfolio data

• Used by advisers to

design a portfolio for

their customers based

on their risk/reward

profile

• Particularly on non-

advised platforms

• Boxing up the same

underlying investment in

a different package, and

then offering it in

different tax wrappers

• Performance tracking of

the portfolio

• Analysis of client‟s

investment portfolio,

including asset allocation

breakdown, tip holdings,

sector weightings and

performance data

• Provision of summary

reports on the investment

related taxation due over a

specific period

(quarterly/annually)

• Claims on tax refunds at a

standard rate (20% as of

2009) on behalf of the

customers

Platforms provide services which benefit fund managers, advisers and customers. There are a

number of transaction processing activities that would otherwise need to be conducted by the

fund manager or its TPA This page and the following page articulates the detailed activities conducted by platforms and who in the value chain are the key beneficiaries of the activity in that

they would have to do the activity themselves in the absence of the platform.

Customer

Adviser

Fund Manager

• Compliance with tax and

regulatory directives

• Follow up and updates on

regulatory changes

Key

Page 35: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

35

Key Platform Stakeholders – Services Breakdown

Client reporting Investment accounting

Data validation & oversight

Fund accounting

Valuations Transfer agency

Financial data / unit price feeds

Client money management

Custody /safekeeping

Nominee holdings reconciliation

Reporting Admin

Wrap portal

Cash management

Investment operations

Commission

Customers and advisers benefit from reporting tools, especially by being able to review the

whole investment portfolio performance in one place and have access to streamlined reports

• Creating quarterly or monthly reports for

customers identifying all the movement

within the account

• Review and monitoring of transactions to

minimise errors

• Valuation of wrap investment contracts with

various valuation approaches e.g. income,

market or cost approaches

• Link to real-time data on pricing for

customers/advisers

• Holding of the client investments either

directly or indirectly

• Front-end web portal for customer/adviser

access to investments

• Cross-checking between the funds held by

customers and those registered against the

nominee account in their name

• Valuation of funds and overall investment

position on a daily basis and the

associated accounting treatment

• Responsibility for investor record

keeping, fund transactions and

shareholder voting

• Holding of client monies in

segregated accounts

• Management of the customer

cash position

• Back office management of

investments

• Facilitation of adviser

commission/adviser charge

The slide highlight the reporting and administration elements of the value chain where platforms conduct activities.

Customer

Adviser

Fund Manager

Key

Page 36: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

As a discrete part of the data collection process, platforms were asked to identify the key services they provide to fund managers and were asked to outline the costs of

providing these services. Four platforms were able to provide data (2 Fund Supermarkets, 1 Wrap and 1 Hybrid) and the results are outlined below:

Estimates of costs of providing services to fund managers (bps equivalent)

Based on the indicative values provided by

platforms, the total cost of providing services to

fund managers is estimated on average to be

11.9 bps.

The platform services with the highest cost are:

Management of investor/ advisor queries

including corporate actions

Access to distribution channels

Record keeping / providing access to

investor/advisor information

Aggregation of deals.

The sample Wrap provider estimates are

significantly above other estimates. This may

reflect a more comprehensive service proposition

for advisors (the Wrap provider estimated costs of

nearly 10 bps for adviser / investor support).

Some platforms may already make explicit

charges to fund managers for some of the

services opposite – e.g. corporate actions.

Deal aggregation

Payment of commissions to advisers

Access to distribution channels

Recording keeping/ provision of adviser and investor information

Management of investor/ advisor queries and complaints/ corporate

actions

F Smkt 1

Performance reporting

Other

IT costs

Wrap D2C

0.3

0.1

4.3

3.3

1.2

0.1

0.0

0.0

0.4

0.1

0.9

0.2

0.2

0.0

0.7

4.5

3.9

3.4

2.1

1.9

9.8

1.7

0.0

0.0

[Redacted]

Average

[Redacted].

Total 10.9 8.6 22.8 11.9

Overheads 1.6 1.6 0.0

A sample of 4 fund managers were asked to provide estimates of the value of the services provided to them by platforms. Responses received varied considerably.

Some fund managers estimated the services provided to be minimal or even zero, whereas others estimated the value to be approximately 25bps (which is the

average rebate received by platforms from fund managers). Fund managers also indicated that the payment to platforms included access to distribution channels (e.g.

one fund manager valued this at 15bps).

Fund managers currently receive services from platforms, including access to distribution and

‘downstream’ relationship management. While fund managers are not currently generally

explicitly charged for these services, these are estimated by platforms to cost them around

12bps on average - although the range of costs estimated varied considerably

Key Platform Stakeholders – Services Breakdown

F Smkt 2

36

Page 37: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

• The first platforms were introduced in the UK in 2000, since then assets

under administration (“AuA”) have grown substantially.

• In Q2 2011, £164.1bn of assets were held on advised platforms.

• Advised platforms have seen rapid growth in the last five years, AuA on

advised platforms increased at a CAGR of 12.1% between 2006 and 2011.

• In addition to this, there are number of D2C (or non-advised) platforms

where the consumer makes investment decisions themselves without

advice. In Q4 2010, the AuA on D2C platforms are estimated to be

c.£64.9bn, the majority of which, at 55%, are held by Hargreaves

Lansdown, Barclays and Fidelity.

• Combining the AuA of the two platform types, platforms represent around

16% of the total UK retail AuA. This relatively low share reflects the fact

that the rapid growth of platform AuA has not just been as a result of the

transfer of legacy (or pre-existing) books of investment business onto

platforms. Instead, platforms are a key channel with respect to new

business sales and represented 41% of total gross retail sales as at Q3

2011.

• This highlights the large potential for future growth of the platform market

as a larger proportion of both new and legacy assets are migrated on to

platforms.

In Q2 2011, around 16% of total UK AuA were held on platforms, the majority of these being

held on advised platforms which have seen strong growth, particularly between 2005 and 2011

37

Total FuM and Advised Platform Growth 2001 - 2011

Au

A (

£b

n)

Market Background Platform Market Overview – Platform Share of Total Market AuA

Note: 2011 IFA platform AuA reflects AuA at Q2 2011

Source: IMA, Platforum Aug 2011

Platform Share of Total UK AuA – Q2 2011

Source: IMA, FSA, ONS, CityUK, Deloitte

analysis

Note: (1) Total AUA on UK platforms are

estimated based on total AUA on advised

platforms as at end of Q2 2011 (£164bn) and

total AUA on main UK non-advised platforms

as at end of Q4 2010 (£64.9bn), (2) Total UK

AUA are estimated based on various types of

products for Q4 2011

Off platform£1,111bn

Advised platforms£164bn

D2C Platforms

£65bn

0

20

40

60

80

100

120

140

160

180

0

100

200

300

400

500

600

700

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total FuM IFA Platform AuA

N/A

Au

A (

£b

n)

Page 38: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

• 6 platforms have entered the market since 2009 and 11 platforms since

2006.

• With new platform launches and the growth of smaller players, the market

share of top 3 platforms (Skandia, FundsNetwork and Cofunds) has

reduced. The total market share of the top 3 and top 10 players still

represent respectively 48% and 67% of total UK advised platform AuA.

• AuA growth amongst the smaller players has also continued. In August

2010, Platforum reported that ten platforms had in excess of £1bn AuA,

one year later there are now 12 platforms with in excess of £2bn of AuA.

• Recent new entrant announcements have included:

‒ AJ Bell‟s SIPPcentre – previously this platform only offered SIPP

wrappers but in July 2011, GIAs and ISAs were introduced. This

means it can now be considered a full wrap platform offering.

‒ Pershing – this platform is expanding its offering from pure

custodian services to include wrap capabilities for „high end‟

advisers.

‒ True Potential – historically a national IFA group, this platform

announced in January 2011 its intention to launch a platform

proposition in association with SEI (who will provide the core

trading and administration functionality).

• Other players that have stated their intention to launch a platform include

Aegon, Barclays Wealth and Zurich. All of which have stated that they will

be partnering with a technology provider to launch a platform rather than

developing their own technology.

• One platform has closed to date. Macquarie closed its platform in Q4 2010.

The reasons cited for its closure, included “execution challenges and

difficult business conditions”, exacerbated by the fact that it has only

attracted a small number of advisers.

In Q2 2011, there were 12 platforms holding more than £2bn of AuA. New participants have

continued to enter the market and others have announced an intention to enter the market

38

Market Background Platform Market Overview – New Entrants

6 67

89

13

15

18

20

22

24

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Number of Advised Platforms launched 2001 - 2011

Top 3, £109bnTop 4-6,

£60bn

Other, £26bn

Source: Platforum Aug 2011

Total AuA split by platform size Q2 2011

Nu

mb

er

of

pla

tfo

rms

Page 39: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 39

Market Background Platform Market Overview – Key Platforms

• The graph on the right shows the key platform players in the market – both

advised and non-advised.

• The three largest platforms are Skandia, FundsNetwork and Cofunds.

FundsNetwork were established in 2000 and 2001 respectively and have grown

significantly since inception.

• A significant proportion of platforms are owned or invested in part by other

participants in the retail investment value chain. These include:

‒ Fund managers; for example, FundsNetwork (Fidelity),and JPM Wealth

Manager (JP Morgan);

‒ Life insurers; for example, Old Mutual (Skandia), Standard Life, Royal

London Group (Ascentric) and Axa (Elevate);

‒ SIPP providers; for example, Alliance Trust, James Hay and AJ Bell; and

‒ Advisers; for example, advisers own a share of Transact and Nucleus.

• A limited number of platforms are independently owned, these are typically the

D2C platforms (Hargreaves Lansdown) and smaller wrap platforms (Novia).

• An overview of the ownership of platforms is shown on the next page.

AuA by UK platform (£bn)

Source: Platforum 2011.Money Management

Advised platform D2C platform

Three new entrants in 2011– Societe Generale, AJ Bell, Pershing and True

Potential are not included on the above chart due to the lack of full year financial

information.

There are currently 24 active adviser platforms in the market with three main D2C platforms.

Many are owned by other players in the retail investment value chain

0.2

0.3

0.3

0.4

0.6

0.8

0.8

0.8

1.1

2.6

2.9

2.9

3.3

3.5

3.6

9.5

10.7

10.8

33.2

29.0

40.0

3.8

10

17.5

8

0.0 10.0 20.0 30.0 40.0

Wealthtime

Avalon

Praemium

Parmenion

Aviva

James Brearley

James Hay

Novia

JPM Wealth Manager

Adviser Choice

Elevate

Nucleus

Ascentric

Alliance Trust

Seven IM

TD Waterhouse

SEI

Barclays Stockbrokers

Transact

Standard Life

Hargreaves Lansdown

Cofunds

FundsNetwork

Skandia

Page 40: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Jupiter/Threadneedle

Life insurance companies are the largest investors in the platform market. Platform ownership

is intended to assist them in retaining their legacy business

Market Background Platform Business Models - Ownership

Platform (ordered by size) Advisers

Parent Company type

Cofunds

FundsNetwork Fidelity International

Hargreaves Lansdown

Skandia Platform Skandia UK Group

Transact

Ascentric Royal London Group

Adviser Choice

Standard Life

Elevate AXA UK

Novia

Nucleus

Barclays stockbrokers

TD Warehouse

SEI

7IM

AJ Bell

Barclays

SIPP Centre

AVIVA Wrap AVIVA

Raymond James Financial

Toronto-Dominion Bank Financial Group

Praemium

James Hay

Wealthtime

Avalon

James Brearley

Owned by a consortium of advisers

Positive Solutions

Standard Life

Parmenion Parmenion DFM

Ownership of platforms (by type)

Life insurance company

Fund manager

Bank/Financial Services Group

SIPP provider

DFM Alliance Trust

Legal and General/Prudential

Adviser

Alliance Trust

James Hay

Note: Parent companies have only

been highlighted where they are

participants in the Retail Investment

Value Chain

Source: Company accounts and

Company websites

TP Wealth Platform True Potential

Pershing

Asset servicing

BNY Mellon

Sanlam

JPM Wealth Manager JP Morgan

Retail Investment Value Chain

Fund Manager/Product Providers Other

The diagram below plots each of the main platforms in the market and highlights those platforms which are owned by a participant in the retail investment value chain.

Owned by advisers

40

Page 41: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Business Models Market Background

41

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Platform Market Overview 30

Business Models 41

Key Platform Stakeholders 52

Adjacent Markets 68

International Case Studies 76

Business Model Analysis 84

Competition Analysis 128

Appendices 179

Page 42: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

42

Business

models

Fund Supermarkets Wraps Hybrids Non-advised platforms

Scope • These are large scale platforms;

each has AuA in excess of £30bn

• Historically have provided access to

a smaller range of product types

• Investment trusts and OIECs are

typically excluded

• Typical AuA of a wrap is less

than £10bn*

• Open-architecture i.e. offers

„whole-of-market‟ investment

options

• Full range of tax wrappers

• Typical AuA of a hybrid is

less than £10bn*

• Open-architecture i.e. offers

„whole-of-market‟

investment options

• Full range of tax wrappers

• The largest non-advised platform

has AuA of £17bn

• Offer a similar product range to

the Fund Supermarket model

• Transaction based offering

without the need for adviser tools

Access • Via advisers • Via advisers

• Via advisers

• Customers access

investments/funds directly

without seeking adviser help

Target user • A wide range of advisers and

customers, although penetration is

believed to be less in the high net

worth segment instead attracting,

mass-market IFAs whose

customers have simpler investment

requirements.

• Typical customer AuA of £38k*

• Advisers use wraps for clients

with more complex

investment needs due to the

wide range of products

available and the high service

levels

• Attracts fee-based advisers

(due to the charging structure)

• Typical customer AuA of

£105k*

• Similar customer profile to

those on wraps

• [Redacted]

• Attracts fee-based advisers

(due to the charging

structure)

• Customers confident in making

their own investment decision

without the need for advice

• [Redacted]

Charging

structure

• No up-front platform charge –

funded by rebates paid by fund

managers

• Some have recently announced the

option for unbundled charging

• Explicit platform charge paid

by the customer

• Dual funding structure.

Partly funded by fund

rebates and partly by

upfront customer platform

charges

• No up-front platform charge –

primarily funded by rebates paid

by fund managers

• Revenues from customer with

respect to transaction charges

For the purposes of our analysis we have identified four main platform business models

prevalent in the market. The primary differentiator between the models is the charging

structure

Business Models

Note: * Based on our sample of platform analysed in the Business Model Analysis

The Business Models used in our analysis were discussed and agreed with the FSA. The table below highlights the high level characteristics of the different

business models.

Page 43: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

The majority of platforms in the market operate a wrap business model, but volumes of AuA

are concentrated in the 3 Fund Supermarkets present in the UK

Market Background Business Models – Size

• Fund Supermarkets are the leading business model in terms of total

AuA but this is concentrated across the largest three platforms.

• In terms of number of platforms, the majority of businesses operate

the wrap model, with 19 likely to be active by the end of 2011.

Although, a number of these have been operational for more than five

years, in particular Nucleus (launched in 2000).

• Wraps have been the most common new entry model as the model

can be used to create different propositions targeted at specific

customer niches. For example, many are targeted at the high net

worth sector and the advisers who service them, as this is perceived

to be higher margin business. High-net worth advisers tend to be fee

based and therefore are attracted to the wrap model as it mirrors their

charging structure. Wraps typically have a smaller average AuA.

• Non-advised platforms have a 16% share of the total platform AuA in

June 2011, 65% of the AuA are held by Hargreaves Lansdown.

£110.2bn, 56%

£40.1bn, 21%

£13.7bn, 7%

£31.3bn, 16%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Fund Supermarkets Wraps Hybrid Non-advised

Total Platform AuA split by business model as at June 2011

Au

A (

£b

n)

AuA not included in graph as

new entrants and no financial

data available

Cofunds

FundsNetwork

Hargreaves Lansdown

Skandia Platform

Transact

Ascentric Raymond James

Standard Life

Elevate

Novia

Nucleus

Barclays Stockbrokers

TD Warehouse

SEI

7IM

SIPP Centre

AVIVA Wrap

Praemium

James Hay

Wealthtime

Avalon

James Brearley Parmenion

Alliance Trust

TP Wealth Platform

Pershing

Fund Supermarkets Wraps Hybrid Non advised

Zurich JPM Wealth Manager

Source: Company financials, Platforum and MoneyMarketing

This page splits the platform market AuA and allocates the platforms in the market between the Business Model types used in our analysis.

43

Page 44: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Annual Management Charge (“AMC”)

• On a typical retail share, an AMC of 150bp is charged to the customer in respect of the cost of managing the

investment. This compares to the 75bp charged for an institutional share class (in other words, shares sold by fund

managers to large institutions such as pension funds). This reduced price is available to large institutions due to the

large scale of their transactions. When this institutional price (or a price which does not include adviser or other

charges included) is charged for a share it is referred to as the „clean share class‟ price.

• These two share classes – retail and institutional are the primary share class types (and therefore prices)

commonly available in the market when buying funds.

• In recent years, some low cost funds have launched in the market, particularly in the case of passive funds such as

those offered by Vanguard and Scottish Widows. They have lower AMC‟s which can be low as 15bp.

Components of the AMC

• Across the retail investment value chain, on a typical retail share, an AMC of 150bp is charged to the customer in

respect of the cost of activities related to the customer‟s investment. For a retail share class with a 150bp AMC, the

fund manager will typically retain 75bp and redistribute the remainder to the platform. Historically, pre RDR, the

typical 75bp rebate from the fund includes for advised businesses the adviser commission (typically 40-50bp) and

the platform charge (between 30-50bp). The platforms, upon receiving the rebate from the fund, will facilitate the

payment of the adviser commission to the adviser through the customer‟s cash account and on its own discretion

may make a further rebate to the customer. The level of disclosure to the end customer of the individual

components of the 150bp AMC varies by platform business model.

• The level of disclosure to the end customer of the individual components of the 150bp AMC varies by platform

business model. These are discussed further on the next page.

Total Expense Ratio (“TER”)

• The TER, measures the total cost of investing in a fund. Total costs may include various fees (legal and

accounting) and other expenses. The TER is calculated by dividing the total cost by the fund‟s total assets and is

shown as a percentage. It may vary from year to year as costs do not always remain the same. TERs on actively

managed funds can range from 1.0-3.0%, depending on the type of fund chosen.

• One of the biggest components of the TER is the AMC discussed above. Another charge which can be

incorporated into the TER is the initial charge. This is the sales fee charged by the fund manager for the initial

investment. In many cases a proportion of this may be passed on to the adviser as a form of commission.

44

Market Background Business Models – AMC

The average AMC charged to customers for a retail fund in the UK is 150bp, platforms

typically take 25-50bp of this as their remuneration

Customer

150bp AMC

Fund Manager

Fund manager retains

75bp and re-distributes

the reminder to other

stakeholders

Platform

Adviser

Commission,

typically 50bp

Rebate 25-

50bp

Customer

rebate

Breakdown of the AMC between stakeholders

Source: Deloitte analysis

There are a number of different measure that can be used to measure the cost of the investment to the customer, the key metrics are outlined on this page.

Page 45: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 45

Market Background Business Models – Customer rebates

Rebates to customers

• In some instances, platforms choose to pass on a proportion of the fund rebate to the end customer, this is typically where they have been able to negotiate a

discount for the customer based on their scale.

• In practice, the Business Model Analysis highlighted later in the report indicates that a small proportion of the total amount of rebate that is returned to the

platform is rebated directly to customers.

• When rebates are passed on to customers, the primary method for doing this is via a cash rebate. This means that the platform credits the customer‟s cash

account on the platform with the rebated amount. Rebates are typically calculated quarterly based on the underlying funds‟ daily valuations. On a wrap platform,

each rebate will be identified as a separate line on the customer's cash account statement.

• Cash accounts can be automated so that the virtual cash account is updated in real time as payments go in and out and is linked directly to the customers bank

account. However many platforms operate less sophisticated cash account facilities which are manual processes based on spreadsheets.

• Cash rebates help to ensure that the cash account has available funds to pay for any transaction charges, platform charges and the adviser charge.

• As an a alternative to cash, customer rebates may be facilitated through use of a unit rebate. This includes giving the customers additional units of the fund

equivalent to the value of the rebate. Currently a limited number of platforms choose to use this method, platforms typically prefer to use the cash rebate

method as it involves less administration and facilitates the payment of fees.

• There are two main methods of operating a unit based rebate system. Firstly the cash can be rebated to the platform, which will then invest in additional units

on behalf of its customers. Secondly, the fund manager issues the additional units and sends them to the platform for reallocation to individual customers

• In research conducted by Skandia in August 2011*, 51% of advisers stated a preference for customer rebates to be passed on in units as opposed to cash.

25% of advisers would opt for cash rebates with a further 21% stating they had no preference on how platform rebates are paid to their customers.

* Quarterly Adviser Confidence Barometer. Q2 2011, Skandia

Cash rebates are currently the primary method used for providing discounts to customers,

although some platforms do use unit rebates

In some cases, part of the AMC is rebated to the customer. This page looks at the methods that can be used for the rebate to be passed back to the customer.

Page 46: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 46

The key differentiator between the business models is how they are funded (their revenue

model), this impacts the charging structure for the customer

Key: Revenue to adviser - Adviser fees/commission

Revenue to platform - Platform fees/rebates Rebate to customer -Cash/unit rebate Revenue to funds -AMC - bundled or unbundled

Market Background Business Models – Charging Structures

The indicative chart below highlights the different remuneration and charging models used by the different business models, including how the payments flow between

the key stakeholders.

Fund/Product providers

Customers

Adviser

Fund rebate

Commission

Up-front / AMC

Platforms

Fund/Product providers

Customers

Fund rebate

Up-front / AMC

Cash/ Unit

rebate

Platforms Cash account

Fee paid for advice/(can be

paid via the cash account)

Fund/Product providers

Customers

Adviser

Cash/ Unit

rebate

Up-front / AMC

Platforms Cash account

Fee paid for

platform

services

Fund/Product providers

Customers

Adviser

Fund rebate

Up-front / AMC

Cash/ Unit

rebate

Platforms Cash account

Fee paid for advice/(can

be paid via the cash

account)

Fee paid for

platform

services

Fund supermarket Non-advised Wrap Hybrid

Platform

revenue

model

• Platforms are funded by rebate from

fund managers to platforms

• Retained rebates from fund managers

range between 25bp – 50bp

• Wraps obtain the majority of their

revenue direct from the customer, in

the form of an explicit platform charge

• Operate a dual model, receiving

rebates from fund managers and

charging clients explicitly.

• Rebates from fund managers range

between 50bp – 60bp

• Platforms are primarily funded by

rebates from fund managers to

platforms,

• Retained rebates from fund managers

can be as high as 60bp

Illustration

of AMC

payment

and flow of

rebates

Typical

customer

charges

• Zero direct upfront fee to customer

• Transaction charges, switching fees

and exit fees charged by some, levels

vary by platform

• Where fund managers rebate part of

the AMC, this goes direct to the

customer, Rebates from fund

managers range between 25bp – 50bp

• Annual fees range between 25bp and

35bp, in addition are transaction fees of

£12-20 per trade

• Annual fees for SIPPs and ISAs at

between 40-60bp

• On-going and transaction fees charged

• Initial product set up fees can be free,

while some charge annual

management or administration fees (up

to 50bp)

• Transaction fees, transfer fees,

drawdown fees, exit fees and re-

registration fees can be charged

Cash account

Note: These charging models are indicative only for the business

model type, some platforms may operate differentiated charges

Page 47: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 47

The fund supermarket business models have widened the breadth of products they provide in

order to be competitive and hence the available product range is converging across the four

business model types

Fund Supermarkets Wraps Hybrid Non-advised

Skan

dia

Fu

nd

s

Netw

ork

Co

fun

ds

No

via

7IM

Ascen

tric

Nu

cle

us

Av

iva W

rap

Sta

nd

ard

Lif

e

AX

A E

lev

ate

TD

Wate

rho

use

Harg

reav

es

Lan

sd

ow

n

Barc

lays

Sto

ckb

rokers

Investm

ent V

ehic

les

OEICs x x x x x x x x x x x x x

Unit/ Investment Trusts x x x x x x x x x x x x x

ETF/ETC/ETN x x x x x x x x x x x x x

Equities x x x x x x x x x x x x x

Bonds/ Gilts x x x x x

Derivatives x

Cash x x

Structured Products x x x x x

Tax W

rapper ISAs x x x x x x x x x x x x x

SIPPS x x x x x x x x x x x x x

Other pension x x

Offshore Bonds x x x x x x x x x x x x x

Onshore Bonds x x x x x x x x x x

Tools

Risk Profiling x x x x x x x x x

Asset Allocation x x x x x x x x x x x x

Fund Research x x x x x x x x x x x x x

CGT Calculation x x x x x x

Rebalancing x x x x x x x

Market Background Business Models – Product Range

Source: Company websites and Platforum

The table below looks at the types of products and tools available on platforms in the UK market, split by business model type. This list is not exhaustive, it was based

on information collated from third party sources and not direct from the platforms themselves. It seeks to provide an indication as to the product range available of

different platform types.

Page 48: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 48

The following case studies highlight the nature of the different business models and the typical

product and services that are available

Market Background Business Models – Case Studies

Business

model

Example

organisation

AuA Product offering Charges

Wrap Transact £9.1bn Wrappers

– GIA; cash ISA; stocks and shares ISA; SIPP; personal pension;

offshore/onshore bonds; Section 32; qualifying savings plan

Investment products

– All funds; ETFs; hedge funds; institutional funds

– 8,500 funds/products

Tools

– Links to various independent systems such as - Morningstar,

Trustnet, Bloomberg, Standard & Poor‟s and Finametrica

No initial charge

Ongoing fees: between 0.09% and 0.6% on a tiered and

aggregated basis, across the value of a whole client portfolio

Transaction charge: Initial or switching reduces from 0.2% to

0.1% for portfolios that have an average AuA of £1m over the

previous 3 months or reduced to nil if the average portfolio size

has been at least £2m over the previous 3 months

Fund

supermarket

Skandia £36.6bn Wrappers

– GIA; stocks and shares ISA; SIPP (AJ Bell); personal pension;

offshore/onshore bonds

Investment products

– Over 1,000 funds from over 70 fund managers

Tools

– 3rd party fund research - Lipper, Finex, Watson-Wyatt

No initial charge

Ongoing fees: £52.33 per annum investor charge; tiered annual

charge on Offshore Bond (first £15k - 0.70%pa; next £25k -

0.30%pa; over £40k - 0.15%pa)

Transaction charge: no additional transaction charge

Hybrid Standard Life £5.7bn Wrappers

– GIA; ISA; SIPP; SIPP - Commercial Property; Offshore/Onshore

Bonds

Investment products

– Over 2,000 funds from over 100 fund managers; ETFs

Tools

– Portfolio Planning Tool uses stochastic modelling provided by

Tillinghast Towers Perrin

– Model portfolios

No initial charge

Ongoing fees: 0.4% on ISA and Personal Portfolios; 0.6% on

SIPP; onshore bonds; and international portfolio bonds

Transaction fees: no initial, switching or exit charges on our

Core or Platform funds. Transaction charges apply for the direct

equities / gilts or off-platform investments such as term deposits

Admin charges on funds are tiered according to portfolio size.

Large fund discounts, family discounts and adviser firm rebates

are also given

Non-advised Hargreaves

Lansdown

£17.5bn Wrappers

– ISA; SIPP; fund, share, income drawdown pension

Investment products

– Over 2,000 funds from 190 fund managers

Tools

– Limited tools - execution only

– Publications available including Wealth 150

Vantage service

£9.95 - £29.95 per transaction dependent on deal amount

3-5.5% charge of the initial investment to set up fund account,

other set ups are free

No inactivity fee

Annual charge only for some equities in ISA & SIPP accounts.

Charged at 0.5% per year and capped at £200 per account

Source: Company websites, interviews

Page 49: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

-20% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 220%

Nucleus (2006)

TD Waterhouse (1997)

Return on Sales (PBT/ Sales) in 2010

% Sales Growth (5y CAGR)

Non-advised platform businesses and the more established platforms are more likely to be

profitable. While the wraps show more positive sales growth over the last 5 years, only one

major wrap was profitable in 2010

• The graph on the left plots the return on sales for 2010 against the

growth in sales over a five year period (2005-2010). Platforms that

entered the market in the last three years have not been included as

they usually exhibit high growth but would be expected to need a few

years before becoming profitable.

• Based on this sample of platforms, there appear to be some

emerging trends in evidence:

‒ Only four out of the nine platforms in the sample achieved positive

profitability in 2010, two of these were non-advised platforms.

‒ More established platforms typically have higher profitability than

new entrants, with Hargreaves Lansdown and Transact leading

the way in terms of profitability. However there are a number of

new entrants such as Nucleus who appear to be moving towards

profitability.

‒ Wrap business models have exhibited faster rates of sales growth

than the other business models

‒ Unprofitable platforms appear to include life company platforms or

platforms owned by life companies. This may, in part, be

explained by investment by life companies to protect their legacy

book.

• Further analysis on the revenue and cost components of the different

business models can be found in the Business Model Analysis

section of the report.

Platforms growth and profitability and year of establishment

Source: Platform data responses, company financial statements

Note: For the sample of platforms, return on sales data has been calculated based on data supplied by the

platforms themselves. For those not included the sample (Raymond James and TD Waterhouse), publically

available data has been used

Transact (2000)

FundsNetwork (2000)

Cofunds (2001)

Raymond James (2001)

Skandia (2007) Ascentric (2004)

Standard Life (2006)

Fund Supermarket

Wrap

Hybrid

Non-advised

Business Models – Profitability

Hargreaves Lansdown (2003)

Launch date in brackets

49

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Rapid growth of AuA on platforms is likely to continue in the short to medium term. A number

of prospective new entries to the platform market have been announced, with more

anticipated. It is possible to identify a number of distinctive entry strategies being adopted

Market Background Business Models – New entry strategies

Current and short term entry strategies

The fund supermarket business model has been established for the longest period in the UK. Wrap platform models have generally followed the fund supermarkets in

terms of timing of entry in the platform market.

The platform market in the UK has experienced rapid growth, driving the entry of further organisations in the market. New entrants to the market since 2008 include;

Avalon, AXA Elevate, Barclays Stockbrokers, Novia and Wealthtime. Further planned entries to the market have been announced, and other new entrants, incremental

to those already announced, are expected.

A number of new market entry strategies are emerging (in addition to the fund supermarket and wrap propositions). These strategies provide insight in relation to

supply side expectations of the platform market development. The key strategies observed are described below.

Vertically integrated platforms / upstream integration

Retail investment „manufacturers‟, including both fund managers and life companies, have entered the platform market to extend their existing footprint and gain further

revenues across the retail distribution value chain. This strategy has the potential to both drive new business revenues and to protect against legacy business being

churned away from the provider to alternative providers and platforms. As an example, Zurich have announced plans to enter the retail platform market early in 2012.

„Baby wraps‟ / platforms for the restricted advice market

The structure of the intermediary sector is expected to be impacted by the RDR (see Business Model Analysis section). One specific expected impact of the RDR is the

growth of the intermediary segment outside of the independent sector – namely in Restricted Advice. Restricted advisers are likely to require distinctive platform

propositions from the independent sector, focused on the needs of their target customer segments and with a distinctive value proposition. These platforms are likely to

have a more constrained range of funds and product wrappers on platform, drawing parallels with the „Baby Wrap‟ propositions in the Australian market.

D2C platforms

A further expected RDR impact is the expected growth of direct distribution to consumers (see Business Model Analysis section). There are currently only a small

number of platforms targeted at non-advised consumers. More entrants are expected in this part of the platform market, both from vertically integrated providers

seeking to diversify distribution away from intermediation (for example, JP Morgan has announced it will be entering the D2C platform market), and from non vertically

integrated stand-alone platforms (for example, rplan - a planned D2C platform being bought to the market by former Cofunds management).

Downstream integration

Some intermediary firms may seek to develop their own proprietary platforms, instead of adopting the strategy of white-labelling other platforms. The primary driver

here is again to widen their footprint across the retail investment value chain, and to enhance their overall proposition for the retail customer. The availability of platform

technology services (from companies such as FNZ and Bravaura) facilitates the adoption of this strategy for larger groups of intermediaries in the market by reducing

the scale of the upfront investment.

50

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Indicative set up costs for a new platform are between £5m and £30m depending on the type

of new entrant and the model they are looking to pursue

Market Background Business Models – Indicative Set Up Costs

Source: Deloitte analysis B2B2C Platform Full Platform

Platform

launch

Development

Examples:

Regulatory approval

Legal / Compliance

Marketing

Recruitment & training

Vendor due diligence

Operating model design

Initial wrap software

license

Core trading engine

User interface

Tools for advisers /

customers

Integration with IFA /

banks and building

societies

Integration with existing

systems and with other

product providers

Basic functionality

Limited 40-50 mutual funds; GIA, ISA,

PP, SIPP, onshore bonds and

offshore bonds

Simple web portal for advisers and

customers

Basic fact find, risk profiling, financial

planning tool

Minimum integration; interfaces with

IFA back office and building societies

point of sale system

Minimum integration; only data from

current systems, similar to all other

product providers

Full functionality; multiple software modules

required

Wide range of funds (>2,000), ETFs, ETCs,

hedge funds, private equity funds; GIA,

ISA, PP, SIPP, MIP, QROPS, onshore and

offshore bonds

Intuitive user interface; multi-channel user

interfaces covering devices such as

phones / online / ipad

Fact find, risk profiling, financial planning,

cash flow modelling, tax calculator, model

portfolio, asset allocation tools

Fully integration into all advisers‟ back

office systems; fully embedded into core

banking system

Full integration from wrap front end to back

end of existing systems to achieve

maximum STP

Fees

Initial fees for 3rd party Limited 3rd party software / tools Best of breed 3rd party software / tools (e.g.

Financial Express,OBSR)

Sufficient for restricted advisers

/ banks and building societies Satisfy needs across the market

£5m £20m

£1m £10m

£250k £10m

£5m

£1m £30m

£1m £5m

£250k £5m

Estimated initial investment

Total estimated cost = c.£3 - 7m

1

2

3

Focused Platform Guided D2C Platform

Estimated range of initial investment

„Self help‟ tools, linked

to adviser proposition

Sufficiently linked to

adviser systems

Needs to be able to

record legacy assets

Increasing software

modules required

This page highlights the types of cost that a new platform entrant is

potentially likely to incur on launching a new platform. The ranges used

are indicative only but show the variability in start up costs. For instance,

advisers who wish to start up a platform are likely to have reduced

marketing and distribution costs as they would have direct access to a

distribution network. Development costs will also vary depending on

whether the IT development is done in-house (and is required to link to

existing systems) or is outsourced to a technology provider like FNZ.

51

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Key Platform Stakeholders Market Background

52

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Platform Market Overview 30

Business Models 41

Key Platform Stakeholders 52

Adjacent Markets 68

International Case Studies 76

Business Model Analysis 84

Competition Analysis 128

Appendices 179

Page 53: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Platforms and key stakeholders1

Market Background

Platforms are the link between the customers/advisers and the fund managers, therefore the

demand for platform services can be driven by a number of stakeholders

Key Platform Stakeholders - Introduction

Platforms

Funds

Advisers

Customers

Adjacent markets

Advised platform

Key

Non-advised platform

Other interplays

Substitution

Discretionary fund

managers

• The key stakeholders with an interest in the platform market are fund

managers, advisers and customers. They are all users and

beneficiaries of platform services.

• DFMs are stakeholders of a secondary nature, they link into platforms

to execute trades and to enable them to monitor the investments of

their customers.

• The primary driver of demand for platform services has been from

advisers who have recognised the benefits to both themselves and

their customers from having a portal through which a portfolio of

investments can be monitored.

• Many of the tools that are developed by platforms, such as model

portfolios, are aimed at attracting advisers and making the fund

selection process easier.

• Demand for platform services has also come from customers in the

D2C market, where customers want to make their own investment

decisions without the need for an adviser. Hargreaves Lansdown is

the largest D2C platform and has grown rapidly. Between June 2010

and June 2011, it added 50,000 new customers, taking its customer

total to 380,0002.

• The following pages look at the relationships between these

stakeholders and platforms.

Source: 1 Deloitte analysis

2 Bloomberg (September 2011)

53

Page 54: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

Adviser demand is the key driving force behind the introduction of new funds on platforms

and some increased pressure on prices. Overall the relative bargaining power between the

main market participants appears at present to be relatively balanced

Key Platform Stakeholders – Balance of Power

The relative bargaining power of each stakeholder, in relation to their ability to influence other participants across the value chain, is outlined below.

Market player

Fund

Managers

• Fund Managers increasingly rely on platforms to access the wider distribution market. They increasingly do not negotiate directly with

advisers and customers. Consequently, many have a high dependency on platforms to reach distribution.

• This dependency allows larger platforms to negotiate fund rebates with Fund Managers to a greater extent if they are able to deliver significant

amounts of investment. Possibly, in response to this dependency on distribution, some Fund Managers have continued to develop their own

platform propositions, for example, most recently Close Asset Management and JP Morgan have entered the market.

Platforms • Advised platforms are dependant on advisers for the recruitment of customers and incur marketing costs to establish relationships with them.

While they provide an important channel for fund managers to access advisers, the overall balance of power currently appears to be unclear,

as reflected by the lower levels of profitability in the platform market.

• Non advised platforms manage to reach customers as a result of their current commercial proposition, whereby the bulk of their revenue is

obtained through fund rebates.

Advisers • Advisers have access to customers investments.

• The amount that platforms spend in marketing and development costs highlights the advisers‟ importance for platforms. This importance is to

some extent reflected in demands for fund variety and for low price funds. The latter has recently emerged and is likely to be driven to some

extent by an anticipation of the post RDR environment.

Consumers • In advised markets, consumers rely on advisers for most of their transactions.

• Consumers appear to have limited influence on price outside the D2C market. The proportion of the D2C market of the whole platform market

is still minimal which appears to reduce their overall influence.

• Unless the customer is financially astute, customers are unlikely to influence fund availability or fund choice.

54

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

2.6 3.1

0.7

0.8 0.4

0.5 0.4

0.5

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2009 2010

Institutional Retail Alternative Funds Private Client

55

Retail funds account for 16.7% of AuM in the UK, at £811 billion in 2010. AuM are

concentrated in the top 5 firms which have a 30% market share in 2010

Market Background

Market share of largest Fund Management firms (based on AuA)

Fund market overview

• The UK fund management industry was responsible for managing £4.8

trillion of assets in the UK in 2010, an increase from £4.1 trillion from 2009.

• Of these assets, 16.7% relates to retail clients which is the sector of the

market where platforms operate. Institutional clients are the biggest class,

this comprises insurance funds, pension funds and corporations, sovereign

wealth funds.

• UK fund management organisations may be classified into four different

types (their percentage share of total UK funds is also set out):

‒ Fund Managers (39.1%);

‒ Insurance Companies (28.7%);

‒ Investment (10.7%) and Retail (5.4%) Banks;

‒ Self managed pension funds (2.5%) and

‒ Other (13.6%).

• The total revenue of UK based asset management companies was £11bn in

2010, up from £8.7bn in 2009 (IMA Statistics). The IMA states that its 185

members accounts for 90% of the UK fund management industry.

• The top 5 largest fund management companies have a consistent 30%

market share since 2002.

• Although the top 10 fund companies represent approximately 43% of the

total funds under management, the industry remains a highly competitive

environment. The Herfindahl - Hirschmann Index (HII) was 298 in 2010.

which is broadly similar to the result 15 years ago

• As in the platform market, only a limited number of the large fund managers

are truly independent i.e. companies where fund management is the core

business. The remaining eight are owned by banks or insurance companies.

Key Platform Stakeholders – Fund Managers

Assets managed in the UK by client type

Source: Fund Management, TheCity UK,, October 2011

Other funds include hedge funds, property funds and private equity funds

£4.1 trillion

£4.8 trillion

28%30% 30% 30%

48% 47%44% 43%

0%

10%

20%

30%

40%

50%

60%

2002 2008 2009 2010

Top 5 Top 10

Source: Fund Management, TheCity UK,, October 2011 – based on IMA data

Mark

et

sh

are

Page 56: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Revenue/FuM Costs/FuM Profit/FuM

56

Fund Manager margins improved slightly in 2010 but look set to remain subdued in the short

to medium term

Market Background

• The graph on the left estimates the profitability of the fund management

industry between 2002 and 2010. It looks at three measures, revenue, costs

and profit each as a percentage of FuM.

• Costs appear to have remained broadly stable at between 15% and 20% of

FuM over the period. Since the beginning of 2008, a number of fund managers

have initiated cost reduction exercises looking to streamline, in many cases,

multiple back office functions.

• Profit as a percentage of FuM was between 5% and 10% between 2002 and

2010. Between 2004 and 2007, profitability, on this measure, increased but this

trend appeared to reverse between 2007 and 2009. 2010 saw an improvement

in profitability as revenues improved in advance of costs increases.

• Looking at a different measure, margin as a percentage of revenue, the same

trend can be seen. Margins increased from 17% to 37% between 2001 and

2007. Margins then declined between 2007 and 2009 with a recovery seen in

2010 when it reached 34%.

• Looking forward, it is unlikely that the 2007 margin levels will be achievable

given current wider economic conditions in the short term and profitability will

be subdued across the market.

• Part of this is also likely to be due to the move towards increased use of

passive funds. Passive funds are collective funds, whose objective is to mirror

the performance of a given stock market index (for example ETFs), may also

lead to margin pressure. This is because passive funds typically charge a lower

AMC to the customer (less than 1% AMC), due to the fact there is less day-to-

day monitoring required and due to the fact that they do not incur the costs of

constantly buying and selling shares.

• If both adviser and customer demand continues to move towards these funds,

there may be more pressure on active funds, particularly those which are

under-performing to reduce their prices in order to remain competitive. This

may translate into margin pressure.

• Furthermore, the increased levels of transparency that will result from RDR

(which are discussed later in the report), are likely to put further pressure on

prices and ultimately margins.

Key Platform Stakeholders – Fund Managers

Fund Management Industry Profitability

Source: Fund Management, TheCity UK,, October 2011 – based on IMA data

15%

20%

25%

30%

35%

40%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fund Management Margins

Source: Fund Management, TheCity UK,, October 2011 – based on IMA data

Marg

in/R

ev

en

ue (

%)

Page 57: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 57

Top 100 funds (0.4% of the overall total population of funds) manage just over 40% of market

assets

Market Background

• Both Funds Under Management (“FuM”)and fund sales are concentrated

in top funds. The top 100 funds (3.9% of total number of funds) account

for 43% of funds under management and 55% of fund sales.

• £3.9 trillion of assets were managed by fund management companies

(IMA members) in the UK in 2010, an increase of 17% from December

2009 and a 30% increase from December 2008.

• Platforum‟s survey on advisers conducted in 2011 suggests that the

majority of advisers do not have a single favoured fund manager.

Furthermore, the majority of advisers refer to fund companies rather than

individual fund managers when asked for a preference.

• The same survey also indicates that the overwhelming majority of

advisers do not believe fund manager preference has influence on the

investment decisions they make.

• Research from L&G suggests that advisers choose funds based on the

individual fund manager, fund cost (fees and charges) and the fund

management company, in that order of priority. Recent historical fund

performance is a key metric for advisers to review and can act as a

potential indicator of future performance (although cannot be relied upon).

Favoured fund managers (firms) re-call rate by advisers

Key Platform Stakeholders – Adviser selection of Funds

53.8

15.4 10.8 7.7 7.7 6.2 6.2 6.2 3.1 3.10

10

20

30

40

50

60

Source: Platforum 2011

Sample size: 65

11% 17%

32%

38%

57%45%

0%

20%

40%

60%

80%

100%

AuA Sales

Remaining funds (96.1% of total # of funds) Top 11-100 funds (3.6% of total # of funds)

Top 10 funds (0.4% total # of funds)

Source: IMA Survey 2011

Market share of top funds by AuA and sales (2010)

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 58

There is currently a trend by advisers towards increased use of DFM’s who conduct the fund-

picking and fund performance monitoring for customers on behalf of their advisers

Market Background Key Platform Stakeholders – Discretionary Fund Managers

• A DFM is a fund manger who on a full-time basis actively monitors fund performance to ensure investment choices are aligned to the customers requirements.

• There is a trend by advisers towards increased use of DFM‟s. Research by Platforum, published in October showed that the planned use of DFMs was set to rise

by 5% over the coming six months on top of the 10.5% of respondents already using them.

• In light of the RDR rules, advisers are recognising that it is difficult to review the whole market before making a fund choice for their customer. By outsourcing

this activity to DFMs, it reduces the risk to the adviser and allows them to focus on more holistic financial planning for the customer. Using the services of a DFM

means the adviser can manage the investments of all their clients as the DFM has the power to execute trades on the client‟s behalf by agreeing an investment

mandate with the client.

• In recognition of the growth in demand for DFM services, a number of the platforms have created a DFM arm. This allows the adviser to choose a DFM which is

linked directly to the platform and also allows the platform to retain a greater share of the value chain. Otherwise, platforms will have a panel of DFM‟s that the

adviser can select to use.

• Where the customers assets are on a platform, the DFM links into the platform.

• However, using a DFM incurs additional cost to the customer in addition to the adviser charge or commission. Historically therefore, the full DFM service is not

suitable for all clients and is focused at the high-net worth end of the market. For customers with smaller investment portfolios, advisers can use model portfolios

created by the DFMs. These are a pre-defined set of investment strategies, from which the adviser will select the most appropriate model based on the

individual's customer‟s risk and reward profile. This trend is also shown by Platforum research in October, which indicated that 41% of IFAs surveyed use model

portfolios, an increase from 37% in the previous quarter, with 43% planning to use the technology/approach over next six months.

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

0%10%20%30%40%50%60%70%80%90%

100%

Advised Non-advised

• Advised sales accounted for 55% of retail investment products sold in Q1

2011. This percentage has remained relatively constant since Q2 2006.

In Q1 2011, advisers accounted for retail investment sales of £469

million.

• As at Q2 2011, research commissioned by the FSA identified that there

were 40,566 retail investment advisers in the UK.

• The largest group are the directly authorised IFAs which together

account for 37.7% of retail investment advisers. These are then sub-

divided into the size of the firm i.e. a single adviser, 2-9 advisers or those

in a firm of more than 10 advisers.

• The second largest group are advisers working for banks and building

societies; this accounts for 21.2% of the total population of retail

advisers.

• Many of the smaller IFAs are part of large IFA networks such as Sesame

Bankhall and Tenet. Networks allow smaller IFAs to get back office

support, assistance with regulatory compliance and information relating

to fund manager seminars

• Between 2010 and 2011, there was an estimated 8% decline in the

number of retail investment advisers. Of all the categories listed in the

diagram, the number of authorised professional firm advisers declined by

the greatest proportion, reducing from 995 to 730, or 26.6%. Directly

authorised advisers, declined the most in terms of absolute numbers at

an estimated 1,833 advisers.

• The FSA commissioned research also highlights that the age profile of

retail investment advisers is skewed towards older age profile compared

to the profile of the total UK workforce. 36% of advisers are over 50,

compared to 27% in the wider workforce. The younger advisers tend to

be concentrated in the larger firms, 73% of advisers aged under 35 are in

firms with more than 50 retail investment advisers.

Over 40,000 retail investment advisers are estimated to be active in the UK, with 36% of them

over the age of 50. In Q1 2011 they advised on £469m of retail investment sales

Market Background

59

Key Platform Stakeholders - Advisers

IFA – (1), 8.2%

IFA – (2-9), 19.6%

IFA – (10+), 9.9%

IFA – Appointed rep (all), 15.8%

Tied – Appointed rep (all), 9.7%

Banks and Building Socs,

21.3%

Wealth Management,

10.0%

Life insurers, 2.6%

Authorised professional firm,

1.8%

Employee Benefits consultants, 1.2%

Source: Research: Progress towards the Professionalism requirements of the Retail Distribution Review, RS

Consulting, Dec 2011

Note: numbers in brackets relate to the size of the firm for which the adviser is employed

Retail Investment Advisers in the UK, split by type

Percentage of advised and non-advised sales of retail investment products

Source: Product Sales Data, FSA

Page 60: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

60

Platform penetration has grown, with c.80 – 85% of advisers now regularly using platforms.

On average advisers use between 2 and 4 platforms

Penetration and frequency of platform use

74% 79%

• Independent sources suggest that platform usage ranges between 80%

and 85% depending on the range of IFAs surveyed.

• Research suggests that advisers use an average of 2.2 platforms, with

65% of IFAs using between 2 and 4 platforms. However, for new

business, 53% of advisers use a single platform

• The proportion of new business being written on platform (as a proportion

of total adviser business, including non-platform users) rose from 48% in

May 2009 to 57% in May 2011. The same statistic for new business was

34% and 44% over the same period. 71% of advisers place new business

on a platform, up from 30% in 2010.

• Capita Financial Software has a tool - Synaptic Comparator - which can

be licensed by advisers to model which platform (or an off-platform

solution) would provide best value for the client‟s portfolio over the lifetime

of the product.

• Due to the current cost of licensing the software (around £40,000 per

year) few small advisers have been able to purchase the software and it is

typically used by larger IFA groups or networks. There is also a

disincentive for advisers to have their clients spread across a wide range

of platforms as it negates the platform benefit to the adviser themselves.

74 79

1512

7 24 7

0

10

20

30

40

50

60

70

80

90

100

2010 2011

Regularly use Occasionally use Intend to use in the future Do not use

% o

f ad

vis

ers

su

rveyed

2%

4%

65%

26%

3%

0% 10% 20% 30% 40% 50% 60% 70%

Migrating towards 1 platform

Use 5 or more platforms

Use between 2 and 4 platforms

Use exclusively 1 platform

Stopped using platforms

Source: NMG, IFA Census (May 2011)

Number of platform used per IFA respondents (%)

Source: Investment Trends – Adviser Technology and Business report as featured in Money Marketing,

NMG

Key Platform Stakeholders - Advisers

Page 61: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

5%

8%

13%

14%

18%

32%

41%

64%

70%

79%

80%

0% 20% 40% 60% 80% 100%

Brand

Other added value services

Suite of tools

Adviser remuneration options

Broker support

Financial strength

Products/ tax wrappers offered

Technology capability

Service quality

Price and charging structure

Fund range • Advisers drive demand for platforms in the advised sector by

recommending their use to their customers.

• The NMG IFA census suggests that the advisers‟ primary considerations

during the platform selection include fund range, price, service quality and

technology capability. It is important for some platforms to have a minimum

amount of funds (at least 1,000) to meet advisers perception of a wide fund

range, despite the fact that funds are concentrated between a relatively

small range of fund managers as shown on page 551.

• Advisers benefit from a reduced administration burden when using a

platform. This is because of the administration cost traditionally required

when signing a customer up to a new fund, and through the lifecycle of

managing the customers investment is largely generated by the platform.

• FSA/Deloitte interviews indicate that platforms and fund managers also

perceive the sustainability and stability of a platform as the primary drivers

of advisers‟ platform selection.

• Platform switching costs (and other barriers) are currently considered to be

significant by advisers due to the administrative burden and the current

frictional costs associated with re-registration. Switching costs are

discussed further on the next page.

• In 2011, 77% of advisers stated that they are unlikely to change platforms

over the coming 12 months, as they wait to see the impact of the proposed

reforms and the impact of RDR3.

Source: NMG, IFA Census (May 2011)

1 Interview feedback 2 Unbiaised.co.uk 3 Platforum

Platforms have become a key tool for advisers attracted by the work transfer benefits and easy

access to a wide range of investment products

Platform selection criteria by advisers

Market Background

61

Key Platform Stakeholders - Advisers

Page 62: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

• There are a number of fees that platforms charge customers for moving

their investments either between funds (switching fees) or between

platforms (re-registration fees). However based on the data collected in

the Business Model Analysis these appear low in the context of the size

of the average client investment.

• Outside of these financial charges, there is an administration and time

cost to the adviser of moving clients to alternative platforms. This cost

relates to the requirement to provide advice on the transfer to the

customer (with an associated cost to the customer) and obtain signed

evidence of the agreement. The administration costs incurred by the

adviser could be up to £600 per customer1.

• In addition, a number of platforms do not allow assets to be re-registered

off their platform. In this instance, if the customer wishes to move their

assets they must encash their investments and re-purchase them

elsewhere. This has a number of additional costs for the customer, with

respect to exit fees, the opportunity cost of leaving the market and the

potential of incurring a tax liability (if the investments are exited prior to

the date of expiry of the tax wrapper).

• Currently there are low levels of switching activity between platforms by

advisers. Unless the service is extremely poor, the majority of advisers

are unlikely to recommend that their client base move en masse to

another platform. It is more likely that the adviser recommends the client

uses an alternative platform for new investments or more complex

investments if service levels are not adequate.

• In PS11/09 the FSA reconfirmed its intention to mandate all firms which

hold investment products on behalf of retail customers, to allow in-specie

transfers of investments by 31 December 20122. The aim being to make

re-registration easier for customers and therefore to support enhanced

competition between platforms.

62

Key Platform Stakeholders – Switching costs

Types of

switching cost

Description Indicative range*

Re-registration Cost of moving investments off-platform or

to another platform

£0 - £25

[Redacted]

Exit fees A fee or charge assessed to an investor

for withdrawing money prior to a

previously stipulated date

Depends on product and

payment type

Zero for the majority

excluding equities,

bonds

Switching/Dealing

fees

Fee charged to a customer when

switching between types of financial

vehicle

0-25bp

Mandatory re-registration rules coming into force in 2012 should help customers and advisers

to move investments between platforms more easily, incurring reduced switching costs

Indicative financial platform charges for moving/exiting

investments

Source: Deloitte analysis

* Range based on data provided by the sample of platforms targeted in the Business

Model analysis

1 The RDR, platforms and the provision of advice by CWC Research. 2010.

2 Certain products, due to their nature, are not allowed to be transferred without incurring a

tax penalty i.e. Investment bonds. This will remain the case.

Page 63: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

32%

35%

23%

10% I make all the decisions myself

I am not committed to any one way

I have a professional adviser who always consults with me

I leave it all to an expert

Customers are equally divided into adviser-led customers, independent customers and those

who do not commit to either approach. Customers are increasingly using a wide range of

sources to support their investment decisions which has supported the growth of D2C

platforms

Market Background Key Platform Stakeholders - Customers

• The UK population is forecast to grow from 61m in 2010 to 72m by 2035, and

a 5.9m increase (56%) in the number of people aged over 65. Currently there

are £350bn of financial assets within the „approaching retirement‟ segment.

Furthermore, £520bn of housing equity resides with over 75s, much of which

will cascade down over the next 10-15 years, according to the Office of

National Statistics.

• A growing, ageing and increasingly wealthy UK population favours a continued

demand for investment products and financial advice.

• Consumers generally see platforms as offering value for money.

• Consumers are generally not aware what the platform charge is, and those

few who have tried to find out have experienced difficulty in doing so.

• Using a financial adviser is the main information source for 35% of customers

surveyed. However, customers are increasingly using a broad range of

sources to support their investment decisions, primarily financial websites

(26%), newspaper articles (19%), fund providers‟ websites (18%) and bank or

building society branch (18%).

• Consensus research (Nov 2010) suggests that 32% of customers make

investment decisions themselves in comparison with 33% customers who

either work with their advisers or entirely rely on their advisers for decision

making.

Sources of investment information used by customers

Source: Platforum

Investment decision preference of customers

Source: Platforum

7%

8%

9%

11%

18%

18%

19%

26%

35%

0% 10% 20% 30%

Supermarket / platform

Fund rating website

Financial magazines

Newspaper adverts

Bank or building society branch

Fund providers' websites

Newspaper articles

Financial websites

Financial adviser

63

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 64

Although most assets currently are placed on platforms through adviser-led distribution, the

end customers, are a key stakeholder of platforms. The FSA has recently undertaken a

programme of research among users of platform services.

Market Background Consumer behaviour- Overview of Research

• The FSA commissioned research among users of platform services, with the objectives of understanding:

• The „customer route‟ to establishing a platform account;

• How consumers use platforms;

• The extent to which consumers are currently aware of charges and whether these are considered transparent;

• Consumer responses to the proposed rebate bans.

• The research, which was qualitative in nature, was carried out by NMG Consulting.

• A structured sample of 65 existing users were interviewed face to face for around an hour during October and November 2011.

• The sample was structured to ensure a mix of respondents was achieved in relation to:

• Platform business model (fund supermarkets, hybrid and wraps);

• Channel use (advised, direct);

• Value of investments held on the platform;

• Levels of awareness and understanding of platforms.

• As a qualitative research study, the results should represent a wide spread of views among different types of platform customers. However, the design of the

research also means that:

• The sample may not be representative of all platform users, and therefore cannot be used to generate any statistically robust quantitative measures

• There is also a dependency on the platform providers providing a random and unbiased sample to the research organisation.

• The key findings of the research that have relevance to this project are summarised on the following pages. These results, together with other information are

used, to help support conclusions based on possible consumer behaviour in this report.

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 65

Market Background Consumer behaviour – Research Findings

Area of research Key findings Implications for this project

Awareness and

understanding of

platforms

• There are varying degrees of awareness and understanding of platforms

among platform users, including among advised customers.

• Most platform users are aware of their own „platform brand‟ but there is

considerable variation in terms of understanding what a platform is and what it

does.

• Levels of awareness and understanding are not necessarily correlated to

levels of assets or types of platform used (for example whether a wrap or fund

supermarket is being used).

• Consumers do not have a homogenous starting

point in terms of their knowledge or

understanding of platforms, even among the

consumers of a specific business model. Their

behaviour and responses to change can be

influenced by their levels of knowledge and

understanding.

Platform selection /

use in advised

models

• Advisers drive the selection of a client‟s platform. A common practice is for

advisers to recommend one platform to a client, rather than to compare

alternative platform solutions.

• The role of the consumer in advised models is passive in relation to platform

selection.

• After the platform has been selected, there are few examples of a client‟s

platform being switched.

• Advisers play the central role in platform

selection currently.

• The consumer research did not indicate that a

comprehensive exercise evaluating platforms for

each individual client was carried out.

• Advisers do not currently appear to switch

platforms for their clients frequently.

Platform selection /

use in direct models

• Non-advised customers use platforms to directly access the fund management

market without having to use adviser services.

• These customers seek limited information when selecting a platform (although

there is little choice in terms of numbers of D2C platforms currently). The

strength of the platform brand plays a role in selection.

• There appear to be both high levels of satisfaction and inertia in relation to

platforms. Many consumers believe they are accessing a „‟service”.

• There are restrictions on consumers exercising

„informed choice‟ currently in the D2C market.

• Customers of D2C platforms value the platform

services they receive highly.

• Consumers do not appear to switch platforms

frequently.

Use of platforms in

advised channels

• The platform is seen by consumers as more of an adviser tool, adding value to

the adviser proposition, than a tool for themselves.

• Advised customers have limited online use of platform facilities. Some use

online access to monitor the value of their portfolio.

• Consumers in the advised channel are likely to

continue to follow the adviser recommendation

on choice of platform.

• Consumers in the advised channel are not likely

in general to significantly interact with their

platform.

Consumers rely on their adviser’s recommendation for selecting a platform in the advised

channels. In direct channels the platform brand is key to the consumer selection process. There

is currently little evidence of switching between platforms

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 66

Consumers are not aware of the costs or charges in relation to platform use. Some consumers

using non-advised channels believe they receive the platform service largely ‘for free’

Market Background Consumer behaviour – Research Findings

Area of research Key findings Implications for this project

The role of

platforms in the

distribution value

chain

• Platforms are seen by consumers in advised channels as fulfilling a role of

administrator and organiser of their investments.

• Some see that platforms undertake a quality control role in relation to selection

of funds and products they will place on the platform – acting as a „gatekeeper‟.

• Some consumers will see funds and products on

platforms as being „endorsed‟ by the platform.

Platform charges –

advised channels

• There are currently low levels of awareness in relation to charges; what levels of

charges are made and how the fees are shared between the fund manager,

platform provider and adviser.

• Consumer focus is on performance, and on the impact of overall charges on

yield.

• Lack of transparency in relation to charges is not a significant issue for most,

although there is some expectation that there are „kickbacks‟ and commercial

arrangements between stakeholders.

• Consumers are generally not aware of the of role the cash account plays in

facilitating charges. There is a perception that the cash account does not

represent accessible money for the consumer.

• There is likely to be more discussion between advisers and their customers on

charging post RDR.

• Consumers currently have low levels of

engagement with charges.

• Consumer focus is on overall performance.

Charges are important at an overall level in

relation to the „drag‟ this may have on yield.

• Cash rebates paid into cash accounts may not be

significantly valued by some consumers, if they

regard this as inaccessible funds.

• There is likely to be increased pressure on adviser

fees post RDR – irrespective of the proposed

rebate bans.

Platform charges –

direct channels

• Many consumers believe the platform is largely „free‟ to them as they are not

paying direct up front charges.

• Direct consumers focus on levels of fund management charges.

• Consumers believe these platforms represent good value as they are benefiting

from the buying power the larger D2C platforms exert over fund managers,

which results in lower fund management charges.

• Charging explicit platform fees to customers may

receive a negative response from some

customers, even if total charges add up to less

than current charges, particularly where

customers view they currently receive platform

services for free.

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 67

Charges of 0.25% - 0.6% for platform services appear acceptable to most consumers using

platforms. Banning rebates would be generally welcomed by consumers, although there are

some specific concerns relating to the implications of the bans

Market Background Consumer behaviour – Research Findings

Area of research Key findings Implications for this project

Levels of platform

charges

• There are low levels of knowledge of current platform charges across

consumers using all platform models.

• When presented with „typical breakdowns‟ of fees between fund managers,

platforms and advisers :

‒ Consumers felt most able to challenge fees among advisers, and least able

to challenge fund management fees;

‒ The „typical‟ platform fees of 0.25-0.6% were considered reasonable, and at

the lower end were considered to represent value for money, although

those with larger portfolios challenged the uniform basis point fee concept;

and

‒ Some indication from consumers that there would be a tolerance of annual

fees in the £00s rather than £000s.

• Consumers do not start from a good base of

knowledge in relation to the costs to them of using

platforms.

• The typical current platform charges presented

appeared acceptable by consumers.

• There may be some pressure for platforms to

move away from a uniform basis point fee for

investors with larger portfolios.

Response to

proposals to ban

fund manager and

cash rebates

• The proposals were generally seen by consumers as being a positive step,

although some expressed strong views against the proposals.

• Positive responses were driven by a perception that costs would be more

transparent – and that this transparency would facilitate more dialogue in

relation to costs.

• Some consumers also believed transparent pricing would drive greater

competition.

• Those against the proposals had concerns on three counts. These were:

‒ That the charges in total would become more expensive (fund managers in

particular were seen as being likely to put up their fees if platforms did not

exert buying power);

‒ A fear that unbundled charges would lead to complexity; and

‒ Concerns about having to manage the cash account - and in the absence

of rebates, concerns that customers would have to pay directly for fees.

• In general, consumers welcome the proposals

although there are some implications of these,

such as the potential for complexity and the

challenge of managing the cash account to pay

fees, they may see as challenging.

• Consumers were not given information during the

research process in relation to unit rebates, and

the potential for fund managers to compete

through levels of unit rebating. If consumers had

been given this information, their views on

potential levels of competitiveness among fund

managers post ban may have differed from those

reported in the research.

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Adjacent Markets Market Background

68

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Platform Market Overview 30

Business Models 41

Key Platform Stakeholders 52

Adjacent Markets 68

International Case Studies 76

Business Model Analysis 84

Competition Analysis 128

Appendices 179

Page 69: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

69

In addition to platforms, there are a number of other vehicles which offer and facilitate the sale

of retail investment products, and some of them are not captured by the bans

• The Market Background Analysis has so far described the platform market

and its key features.

• However, there are a number of other investment markets that provide the

same or similar products to platforms. In addition, all of these products that

are provided by the adjacent markets are either available directly on

platforms (SIPPs, life company wraps, ISAs and funds of funds) or can be

accessed via a platform (DFMs).

• A key differentiator from platforms is that they do not offer the same scope

of the accompanying services that platforms provide, as described earlier in

this report.

• In addition, in contrast to platforms, often these markets do not provide the

advisers or customers with the ability to manage their whole range of

personal investments (through many products), but require them to manage

a collection of separate investments instead.

• As noted when describing the definition of platforms, some of these markets

are included in this definition, while others are not. These are indicated in

the figure to the left hand side.

• Vehicles that are included in the definition will be subject to the proposed

changes, and as such will face a fund rebate and a cash rebate ban.

• The market depicted in blue, which are not captured by the bans, are

deemed „Adjacent Markets‟ for the purposes of this analysis.

• The following pages look at the nature of these adjacent markets, the

presence of rebates in their business models and the potential for

substitution between their products and services and those of platforms.

• These adjacent markets are also considered in the Competition Analysis,

which seeks to assess whether the application of the ban to fund and cash

rebate to platforms but not to these vehicles creates potential scope for

competitive distortions.

Funds of funds

businesses

Platforms:

• Fund Supermarkets

•Wraps

•Hybrids

•D2C Platforms

Participants captured by the bans:

Adjacent markets:

ISA Managers (offering

only a single investment

provider‟s funds)

ISA Managers (who distribute

funds from more than one

provider)

Life company wrappers

Execution only brokers (who

offer clients custodian services)

SIPP providers

Execution only brokers

DFMs

Investment vehicles which offer and facilitate retail investment

products

Adjacent Markets - Introduction

Page 70: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 70

Life insurers offer a similar range of wrappers to those available on platforms although from a

single provider

Market Background Adjacent Markets – Life insurance wrappers

Type Key characteristics Examples

Life insurance

providers offering

tax efficient

wrappers

• Life insurers can offer the full range of insurance

wrappers directly to the customer or adviser off-

platform. These include ISAs, SIPPs, and offshore

bonds.

• Traditionally life insurers have had large direct sales

forces who targeted new business from advisers. In

recent years many life insurers have been reducing

the size of this function and using other lower cost

distribution routes such as platforms.

• Most life insurance products are sold through IFAs

(only 6% are sold direct).

• Aviva

• AXA

• L&G

• Prudential

• Scottish Widows

• Standard Life

• Zurich

Use of rebates

• Life insurers do typically receive some rebates from

fund managers. It is our understanding from the

interview feedback, that currently it is not common

practice to pass these onto the customer, instead

they are used to lower costs internally limiting the

need to raise prices. Therefore, it appears that

customers do not significantly benefit from lower

prices if purchasing directly from a life insurer off-

platform.

Substitutability of products/ funds

• Going direct to a life insurer will

give the customer or adviser

access to products or wrappers

from a single provider.

Off platform On platform

• Platforms can offer the tax

wrappers of multiple life insurers

and providers

Substitutability of services

• Life insurers have invested in the

services offered as part of their

direct offering.

• A number of life insurers now offer

online application processes for

wrapper products. In addition, some

offer the ability to monitor and

manage investments online but are

typically limited to the products the

life insurer are able to offer.

Off platform On platform

• An adviser who uses a platform

would also benefit from having

access to model portfolios,

administration and reporting

services.

• These services would support

analysis reporting on the same

products as provided by the life

insurer in the context of the

customer‟s wider investment

portfolio.

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SIPP Providers offer their products to investors directly with access to the full range of

allowable asset classes; some of the more specialised asset classes may not be able to be

accessible via a platform

Market Background

Type Key characteristics Provider examples

SIPP Providers

• Self-invested personal pensions (“SIPPs”) are a form

of tax wrapper that hold investments until retirement

and the investor starts to draw a pension income. It

is a pension plan whereby the individual can make

their own investment decisions.

• SIPP providers are effectively administrators,

facilitating the customer's investment choices. SIPP

providers‟ main revenue streams are pension

administration fees and charges from DFMs.

• There are a number of types of SIPPs available, low

cost, hybrid and full SIPPs which vary in terms of the

complexity of the investment and the cost of

management.

• There are currently 74

providers in the

market1

• Key providers include:

‒ AJ Bell

‒ Friends Provident

‒ Standard Life

‒ Suffolk Life

‒ Hornbuckle Mitchell

Use of rebates

• Based on the limited sample of interviews conducted

it appears that rebates are not commonly retained by

SIPP providers.

• If rebates are given by the fund manager they go

directly to the client and are retained within the SIPP

product.

• SIPP providers charge product fees whether the

product is bought directly or via platform. Where

these are sold via platforms, the platform may

choose (with agreement from the SIPP Provider) to

absorb the initial set-up fee.

1 “ A Guide to SIPPS”, Defaqto, 2011

Substitutability of products/ funds

• Off platform, the customer or

adviser will commonly access a

SIPP from a single provider.

• In terms of full SIPPs, there will be

the option to invest in the full set of

allowable asset classes such as

commercial property, gold, bullion,

unlisted share and derivatives.

Off platform

Substitutability of services

On platform

• Most platforms offer access to a

range of SIPPs (primarily low cost

SIPPs) from different providers with

access to a wide range of funds in

which to invest.

• However there may not be access

to the more specialised asset

classes such as commercial

property investments required for a

full SIPP.

• Currently the majority of SIPP

business is held off platform at

around 60-70%1

• The majority of SIPP Providers

have sizeable customer service

teams to support off-platform

customers (predominantly with

application or after sales support

requirements).

Off platform On platform

• The platform will act as the single

administrator for all the products

and investments held by the

customer, including the SIPP.

• Advisers may also use the model

portfolios on platforms to model the

clients requirements.

Adjacent Markets – SIPP providers

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There are around 130 ISA Managers in the UK offering products from a single provider who

would not be captured by the bans

Market Background Adjacent Markets – ISA Managers

1TISA 2 Interview feedback

Type Key characteristics

ISA Managers

(offering products

from a single

provider)

• An ISA is a tax-free annual investment product ISA are

tax efficient savings accounts for individuals. The savings

thresholds are low relative to other wrappers with a

maximum investment cap of £10,680.

• ISAs are particularly favoured by lower incomes

customers, 79% of cash ISAs and 59% of equity ISAs are

owned by those who earn less than £30,000 a year in the

2009/10 tax year.

• ISA Managers can include banks, building societies,

National Savings and Investments, insurance companies,

unit and investment trust companies, financial advisers,

fund supermarkets, stockbrokers and some retail stores

and supermarkets.

• Of the 200 ISA

managers in the UK,

around 130 of them offer

products from a single

provider1

Use of rebates

• As in the SIPP market, based on the limited

interview feedback, it appears that rebates

received from fund managers go directly to

customers, typically in the form of cash

rebates paid into the cash account. However,

due to the small number of interviews

conducted, this finding should be treated with

caution.

• ISA managers are predominantly remunerated

based on product fees charged to customers.

Provider examples

Substitutability of services Substitutability of products/ funds

• The underlying tax wrapper is the

same whether bought on or off

platform.

• This type of ISA manager will only

be able to offer its own range of

ISAs rather than access to third

party products.

Off platform On platform

• The platform gives customers

access to ISAs from multiple

providers which gives customers

more choice. This also allows them

to move providers each tax year (on

the same platform) if required,

without losing visibility over the

investments.

• 80% of new ISAs are traded through

platforms (especially equity ISAs)2

Not all platforms offer cash ISAs, for

example, Cofunds and Elevate.

• For cash ISAs where the customer

has minimal servicing

requirements, many customers

purchase ISAs via their bank or

building society based on the

available rate of return as opposed

to the level of services.

• Compared to a platform, the level of

reporting and ongoing servicing is

minimal so it is more suited to those

who do not wish to proactively

manage the investments.

Off platform On platform

• For equity ISAs, the customer can

use a platform to get online access

to a full range of funds and monitor

its performance in the context of a

wider range of investments.

• Platforms may offer reductions on

the initial set-up fee which can be

attractive.

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Fund Managers offer fund of funds products which form a relatively small sub-set of the total

range of retail investment products on a platform, and are likely to be bought as part of wider

investment portfolio

Market Background Adjacent Markets – Fund of Funds Managers

Type Key characteristics

Fund of Funds

Managers

• Fund of funds is an investment strategy of holding a

portfolio of other investment funds rather than investing

directly in shares, bonds or other securities. They are a

type of multi-manager fund. British investors currently

have £63.5bn in funds of funds1.

• On average, a fund of funds invests in between 15 and

30 other funds1. These can be either those from a single

fund manager or can include access to funds from other

fund managers.

• Investment in funds of funds is typically more expensive

as it includes the cost of the underlying funds, this can

require an additional 50 to 75 bps1.

• One of the primary reasons to pick a funds of funds

product is to access hedge funds and private equity

funds.

• A number of the large

fund managers are likely

to have funds of fund

products including M&G,

Threadneedle and

Jupiter.

Use of rebates

• It is likely that rebates are paid from funds of

funds managers to platforms which sell their

products.

• No empirical evidence is available to judge the

size of the rebates being offered or the

proportion of which is passed onto the

customer.

Examples

Substitutability of products/ funds

• The off-platform product would be

the same as the fund of funds

product available on platforms.

Off platform On platform

• Funds of funds products are a sub-

set of the types of funds available

on platforms.

Substitutability of services

• Fund Managers have increasingly

moved towards platforms as a

distribution channel and have

therefore typically not invested in

the off platform customer service

functionality.

Off platform On platform

• Funds of funds products are likely

to form only a proportion of a

customer‟s investment portfolio.

Therefore if an adviser is

purchasing other retail investment

products on a platform it is more

likely that they would also purchase

the fund funds product on a

platform to allow them to have an

overview of all their investments.

1 Are fund of funds a magic wand for investors?, The

Telegraph , 20 Aug 2011

Page 74: UK Deloitte Platforms

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Execution only brokers provide customers with a similar offering to non-advised platforms but

with less ancillary services provided, such as access to research tools

Market Background Adjacent Markets – Execution only brokers

1 APCIMS 2 Compeer Research

Type Key characteristics

Execution only

brokers (not offering

custodian services)

• There are over 100

execution only brokers

in the market1.

Use of rebates

• Rebates are not received by execution only

brokers; their remuneration is a commission

based on AuA of each product sale or investment,

payable by the customer.

Provider examples

Substitutability of products/ funds

• Execution only brokers typically

focus on trading of funds including

investment trusts and OIECS.

• The fund range is comparable to

that of a non-advised platform, with

a choice of up to 1,000 funds.

Off platform On platform

• Platforms also give access to a

wide range of tax wrappers into

which the customer can hold its

investments.

Substitutability of services

• Stockbrokers traditionally were

accessed via the phone and

instructed to make trades by the

customer. In many cases, this can

now be done online.

• As a consequence of reduced

trading volumes, it is expected that

some firms will look to increase the

range of services offer to make

their offering more attractive to

clients2.

Off platform On platform

• Many of the execution only brokers

are unlikely to have the full suite of

reporting services available which

may mitigate the likelihood that

existing D2C platform customers

seek to move their investments.

• Execution only brokers are effectively stockbrokers

who execute customer‟s fund transaction

requirements.

• They provide similar services to non-advised

platforms in terms of the execution and transaction

services direct to customers on a non-advised basis,

typically off platform.

• They either charge a flat fee or an annual

management charge based on the total AuA, in

addition to transaction fees. There is a general trend

towards the use of flat fees as opposed to AuA based

charges.

Page 75: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential 75

DFMs offer customers fund-picking and portfolio management services which were

traditionally conducted by advisers or customers and are therefore not typically seen as a

substitute for platforms

Market Background Adjacent Markets – Discretionary Fund Managers

1 “IFA Guide to Discretionary Fund Management Charges”, Defaqto 2011 2 APCIMS 3 Ascentric website

Type Key characteristics

Discretionary Fund

Managers

• There are

approximately 120

DFMs in total in the UK,

of which 68 offer

execution only

services2.

Use of rebates

• Because DFMs are large investors into all sorts of

assets and collectives, they can purchase external

funds at institutional and discounted rates which

would not be available to a retail investor or IFAs.

• However where these are not available then the

DFM may retain the rebate from the fund manager

on the retail share class. It is estimated that

approximately 5-10%1 of collectives are available

only in a retail share class.

Provider examples

Substitutability of products/ funds

• The DFM service takes on responsibility from the adviser or customer for

selecting or advising on funds, as such the DFM service is not a substitute for

a platform service, furthermore access to DFMs is becoming increasingly

more available on platforms as platforms recognise the adviser demand for

their services (e.g. Ascentric offers access to 22 DFMs3).

Off platform On platform

Substitutability of services

• DFMs typically keep clients and

advisers informed via regular

reports, usually issued half yearly or

quarterly.

• Advisers and/or clients may also be

able to access the portfolio, its

value and transaction history online.

Off platform On platform

• Where the DFM is linked into the

platform, the customer is able to get

more regular updates on

performance.

• As discussed earlier in the section, DFMs actively

manage a client‟s portfolio based to ensure it is in line

with the customer‟s risk profile.

• Over 50 DFMs also provide custody services2, in that

they act as the nominee account holder and hold the

underlying funds on the customers behalf.

• Most DFMs, charge an annual management charge

(ranging between 60bp and 150bp1) based on AuM

with no initial or exit fees charged. Some may also

charge dealing or transaction fees (typically £10-801).

• A number of DFMs offer access to institutional share

classes.

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International Case Studies Market Background

76

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Platform Market Overview 30

Business Models 41

Key Platform Stakeholders 52

Adjacent Markets 68

International Case Studies 76

Business Model Analysis 84

Competition Analysis 128

Appendices 179

Page 77: UK Deloitte Platforms

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Market Background

77

International Case Studies – Australia

Market statistics

• Australia‟s investment management industry is the fourth largest in the world,

and one of the fastest growing. In 2010, the fund management industry was

valued at A$1.7 trillion and is projected to grow to around A$2 trillion by 20151.

• The key drivers of the growth in the managed funds sector are the universal

superannuation (pension) system; a strong insurance sector; and a growing

high-net-worth and retail investor sector. All have benefited from the country‟s

robust 3.3% per annum average growth rate in real GDP from 1998 to 2009.

This GDP growth has compared favourably against the USA (2.3%) and the UK

(2.0%).

• A stable regulatory environment has also supported growth and the proliferation

of non-domestic fund managers.

• In September 2011, 72.4% of managed funds were in superannuation funds.

Australia‟s current „superannuation guarantee‟ system was introduced in July

1992, requiring all employers to make tax-deductible superannuation

contributions on behalf of their employees. The guarantee commenced with an

employer contribution rate of 3% of salary, with increases phased-in over a ten-

year period to the current minimum rate of 9%.

• In May 2010, the Government announced an increase in the compulsory

superannuation rate from 9 per cent to 12 percent by 20201.

• Future growth is forecast to be supported by the fact that the proportion of salary

that is mandated to be saved in the superannuation fund will increase gradually

from 9% to 12% by 2019/20.

The Australian retail investment market is the fourth largest in the world supported by a

compulsory superannuation scheme. This will continue to support fund growth as the

mandatory pension contribution is set to increase from 9% to 12% in 2019/20

1 Australian Trade Commission

Fu

M (

A$ t

rillio

n)

Source: Australian Trade Commission

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Sep

-1988

Sep

-1989

Sep

-1990

Sep

-1991

Sep

-1992

Sep

-1993

Sep

-1994

Sep

-1995

Sep

-1996

Sep

-1997

Sep

-1998

Sep

-1999

Sep

-2000

Sep

-2001

Sep

-2002

Sep

-2003

Sep

-2004

Sep

-2005

Sep

-2006

Sep

-2007

Sep

-2008

Sep

-2009

Sep

-2010

Growth in Managed Funds in Australia 1989 -2011

Au

A (

A$b

n)

Page 78: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

78

Platform AuA were A$375bn in 2009, approximately 31% of total managed funds, the largest

five platforms accounted for 70% of platform AuA in 2009

84.1

61.2

44.4

35.9 33.8

27.0 25.923.5

17.114.1

8.3 0.2 0.20.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Retail AuA held by Retail Platforms (Dec 2009)

Au

A (

A$ b

illio

n)

• The total retail AuA held on retail platforms accounted for A$375bn in 2009,

this equates to approximately 31% of total market managed funds1.

• More than 75% of new investments go into a form of investment platform2.

• The largest five platforms accounted for 70% of platform retail AuA as at

December 2009.

• Platform prices are significantly higher than UK platforms (as discussed on the

next page).

• Due to the transparency requirements, the wrap model is the dominant model

in operation in Australia.

• There are also D2C platforms, for example, Commonwealth operates

CommSec Funds is the largest non-advised platform, distributing over 1,000

funds. It gives access to research and portfolio planning tools for customers.

Platform strategies

• There has been merger and acquisition activity in both the wider financial

services market (for example the Westpac merger with St George in December

2008, owner of BT Financial Group) and the platform market in Australia

resulting in a small number of large players and a wider selection of small

niche players.

• Furthermore many of the larger players offer white-labelling services for new

entrants such as fund managers.

• Offering adviser tools and wider fund choice was a key long term trend

evidenced in the market. However the emergence of „baby wraps‟, i.e. pre-

determined „model portfolio‟, has been a more recent trend. These simpler

products are offered at lower cost and are particularly attractive to advisers

with less sophisticated fund picking abilities.

• An example of this is the Asgard Infinity eWrap, the launch of which was

announced in September 2010. It is planning to target adviser customers with

low balances.

Source: Australian Trade Commission

1 Australian Trade Commission

2 2020 Direct Invest Research, Feb 2011

International Case Studies – Australia

Page 79: UK Deloitte Platforms

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Market Background

79

Types of fees

associated with

a wrap account

Description Indicative range*

Account admin fees Fees charged by the

platform operator

Tiered basis with fees

declining as account balance

increase

Ranging from 0.09% to 1.85%

Investment

management fees

Fees to manage

underlying investment

funds, including potential

additional fee rebates

from fund managers

Typically about half of the

retail fund fees

Some platforms retain a

portion of the rebates

Average Investment Cost

Ratio (ICR) 0.90% per annum

Transaction fees Fees for buying and

selling investments

Typically 0.11% with a

minimum of $30 applying

before advisers add their mark

up or additional fees

Establishment /

entry fees

Fees charged by advisers

for entry

Up to 5.0%

Adviser service fees Service charges by

advisers

Up to 2%

Potential annual

total fees

Total wrap account fees

on $300,000 portfolio

2.55%-3.73%

Source: Investment Insights, Feb 2011

Typical charges associated with Australian wrap account

Australian wrap accounts (or platforms) are associated with high total fees, averaging 2.5-

3.5% per annum, which is primary driven by the high ongoing percentage based adviser fees

• Australian wrap accounts are associated with high fees, particularly the high

ongoing percentage based adviser fees (as highlighted in the table on the

left).

• A wrap account or platform revolves around a central cash account, which

can be in the form of an online bank account, a cash management trust or a

full featured bank account with a cheque book facility. Usually investors are

required to maintain a minimum cash account balance to pay their

administration fees.

• Despite of the high costs, a wrap account is still attractive way to invest

because most new funds and some boutique managers are only available

on investment platforms and the administration fees decline significantly as

the value of the portfolio increases.

• Platforms are able to negotiate additional fee rebates from fund managers.

Platforms either pass these rebates back to the investor in the form of cash

rebates (e.g., Asgard eWrap and Personal Choice eWRAP) or pass on only

a portion of the rebates and retain a portion to increase their profitability

(e.g., BT WRAP).

• In addition to transaction fees for buying and selling investments, investors

can also incur fees such as the buy sell spread, ranging from 0 to 1.5%,

when transacting in managed funds.

• The government is proposing new legislation that will eliminate adviser

commissions from investment products as of 1 July 2012.

• However, advisers have created a new type of fee (often percentage based)

called the adviser service fee or portfolio review fee. A professional hourly

fee or a flat fixed dollar amount for ongoing advice and service are also

available in the market.

International Case Studies – Australia

Page 80: UK Deloitte Platforms

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Market Background

80

• Participation by leading global financial institutions (17 of the top 20 global

investment managers have an established presence in Australia as at

December 2008).

• There are a limited number of funds which are sold directly to individuals,

platforms are the key distribution channel for retail funds.

• A large number of advisors are members of a network to leverage the

business support services offered. The majority of these networks are

owned by a provider and therefore the adviser is often drawn towards using

a single platform by the network.

• There is one single licensing regime for financial advisers with detailed and

prescriptive professional qualification requirements. Furthermore there is a

requirement to disclose the amount of adviser commission being paid and

the fee structure being employed.

• Adviser remuneration is highly flexible and depends on the service level

from advisers.

• Effective from 1 July 2012 are new rules which will ban the payment of

rebates to adviser firms. The Government acted in response to a report by

the Parliamentary Joint Committee which identified that commission bias

could lead to sub-optimal investment strategies or excessive fee

arrangements for customers.

• A number of the larger dealer groups are already moving towards a fee-for-

service based remuneration model, while distancing themselves from

commissions.

Fund providers

Advisors

• The total cost paid by the consumer is generally higher in Australia than in

the UK because of adviser fees. Nevertheless, product access charges (i.e.

fund and platform charges) are on average lower in Australia than in the UK.

• The typical charging structure of 50-65, 25 and 100 bps for respectively fund

managers, platforms and advisors in the Australia market compares to 75,

25 and 50 bps in the UK.

• Bundled and unbundled charging models are available but most of charges

are explicitly “unbundled” and there is a high level of transparency on the

cost of each component.

• There is increasing use of non-advised distribution channel.

Consumers

The majority of advisors in the Australian platform market are part of networks and are

therefore aligned to a single platform, they are moving towards a fee-based model in light of

new regulations on adviser commission

Source: Interview feedback analysis, SME interview analysis

International Case Studies – Australia

Page 81: UK Deloitte Platforms

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Market Background

81

As the platform market in Australia is more mature than the UK market, there are a number of

trends which act as potential indicators of the future direction of the UK platform market Areas Australian market Implication for the UK market

Pricing

• Simpler (and cheaper) pricing is associated with the emergence of

the new „Baby Wrap‟ proposition. The Asgard Infinity ewrap has a

core platform administration fee of 30bp

• The „baby wrap‟ proposition highlights the emergence of different

platform business models targeting different customer segments which

has supported differential pricing

• Lower cost options have been created to target price conscious and

investors with simple investment requirements

Vertical integration

• Most of the leading platforms are owned by an upstream provider,

predominantly the major Australian banks but also insurers and fund

managers

• Mergers and acquisition at a bank level has meant a number of

platforms are now owned by the same parent (for example, BT

Wrap and Asgard)

• As highlighted earlier in the Market Background section, many of the

UK platforms are owned by other participants in the retail investment

chain

• In the longer term, there may be some consolidation as platforms reach

maturity and seek to merge or acquire to complement low organic

growth. However in the short to medium term, platform penetration of

AuA is significantly lower than in Australia and so there is a basis for

further new entry into the platform market

Regulation

• Professional adviser qualifications are already mandatory

• The ban in 2012 on fund manager rebates to advisers will add an

extra layer of consumer protection and enhance the transparency

already presenting in relation to adviser charges

• The Australian market has already been through a process similar to

the UK RDR with respect to the introduction of advisers‟ professional

qualifications and transparency of adviser fees

Rebate bans

• In October 2011, The Australian Treasury announced it would not

be implementing a blanket ban on fund rebates and cash rebates.

• Rebates will be allowed as long as there is a sufficient level of

transparency and they are a mean to achieve “reasonable value for

scale”. It is banning the receipt by platform operators of volume-

based benefits to the extent that such incentives are merely a

means of product issuers or funds managers „purchasing‟ shelf

space or preferential positions on administration platforms

• Cash rebates to customers are also allowed and depend on

platforms individual willingness to pass through rebates to

customers (Asgard and Personal Choice typically fully pass rebates

while BT might only pass a portion of it)

• The Australian regulator has taken a different approach to the UK, citing

the benefits of rebates being related to platforms being able to offer a

scale discount, as long as there is sufficient level of transparency.

Sources: Investment Industry in Australia (Australian Trade Commission), Corporations Amendment (Further Future of Financial Advice Measurers Bill 2011, Asgard website,

International Case Studies – Australia

Page 82: UK Deloitte Platforms

Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Market Background

• Fund managers are currently facing downwards pressure on fees, together

with challenges on maintaining levels of assets under service as baby

boomers reach retirement and seek to de-cumulate.

• There has been significant growth in volumes of ETFs, where charges are

continuing to decline, whilst mutual fund sales have fallen over the last

decade. Nevertheless, mutual funds still represents the vast majority of

investment companies‟ net assets (90%).

• Since 2000, there has been significant consolidation of funds by fund

managers.

• Rebates from fund managers to platforms are permitted and are a relatively

common feature of the market.

• Unit rebates paid by fund managers are not a significant feature of the current

market.

• Platforms are mostly owned by fund providers and typically present “fund

supermarket” / “discount brokerage” propositions with significant numbers of

funds on the platform.

• The US platform market is highly concentrated with 5-6 major platform

providers (including Fidelity, Charles Schwab, Merrill Lynch, Raymond James,

UBS, Morgan Stanley).

• In addition, there are a number of smaller „regional‟ platforms which market

within geographical boundaries.

• There is a significant D2C element of the retail investment market in the US.

There are a range of significant D2C platforms, reflecting the underlying

market.

• Customers typically pay a bundled fee. Platform fees are commonly in the

range of 25-40 bps.

• It is not uncommon for transaction fees to be charged by platforms - typical

transaction fees may fall in the range of $35-40.

• A significant element of the advisor service is considered to be fund selection.

Adviser performance in relation to fund selection has been the focus of

considerable past regulatory scrutiny, and this has driven some elements of

adviser behaviour to change.

• Advisers have experienced a slow migration to a fee based model. In 1995

around 10% of advisers were primarily fee based. Currently there are around

60% of advisers primarily paid by fees.

• Previous regulatory scrutiny on fund selection has been a driver behind

advisers‟ migration from commission to fee based remuneration models

(removing the potential to perceive bias in fund selection).

• Advisors commonly use between 3-5 platforms for their portfolio of clients.

Fund providers Platforms

Advisors

The US platform market is highly concentrated and a small number of vertically integrated

platforms offer access to a wide range of investment products

• A significant investment market with c.90 million retail investors.

• There has been a sizeable D2C channel for retail investment distribution for a

number of years in the US. D2C platforms have helped the growth of this

channel.

• Even in advised channels, customers typically demonstrate higher levels of

engagement with the market than is the case in the UK

• The development of the 401k pensions market has been a key driver of

consumer engagement.

• Retail investors demonstrate high levels of price sensitivity in relation to fund

changes.

• There is strong demand for low cost and passive funds, especially from D2C

customers.

• Some investors are expecting fee reductions aligned to the diminishing returns

they are experiencing.

Consumers

82

International Case Studies – US

Source: Investment Company Institute (2011)

Page 83: UK Deloitte Platforms

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Market Background

83

Areas US market Implications for the UK market

Fund manager behaviour /

Vertical integration

• The US platform market, in common with the

Australian market, has high degrees of vertical

integration, with investment banks and fund

managers owning some of the largest platforms.

• However, there are a range of smaller platforms

with specialisms in market segments.

• Although distribution of retail investment products in the US has some

significant differences from the UK market, it provides an example of a

platform markets whereby a very small number of platform operators

have been able to exert market power

• The distribution of investments in the UK, although different in many

respects, appears also to be able to support niche platform propositions

in the future.

Consumer behaviours

• Although D2C platforms have developed to

command a significant share of AuA in the platform

market, there are some significant differences in

profile and behaviour between retail investors in the

US and the UK market.

• Developments in the pensions market in the US

(and in Australia) appear to have driven consumer

interaction with retail investments.

• It should not be assumed that D2C platforms will develop at the same

pace to reach the same scale or level of significance as in the US

market.

• Pension reform and auto-enrolment in the UK could increase levels of

consumer interest and engagement.

Adviser behaviour

• Advisers typically use of a number of platforms.

This, combined with conditions that allow easy

switching of client assets between platforms have

created a market environment which helps advisers

to switch clients assets between platforms and drive

competition within the market.

• In the UK, if switching of clients‟ assets is increasingly facilitated through

changes in the re-registration rules, consumers should be able to benefit

more significantly from greater competition among platforms and funds.

The evolution of the US platform market reflects some of the differences in the underlying

retail investment markets between the US and the UK

International Case Studies – US

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Business Model Analysis

84

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Introduction 85

Business Model Set-up 87

Current Business Analysis 91

Post RDR Analysis 97

Post Bans Analysis 108

Key Conclusions 126

Competition Analysis 128

Appendices 179

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Introduction Business Model Analysis

85

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Introduction 85

Business Model Set-up 87

Current Business Analysis 91

Post RDR Analysis 97

Post Bans Analysis 108

Key Conclusions 126

Competition Analysis 128

Appendices 179

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Business Model Analysis

86

The Business Model Analysis section comprises four areas – business model setup, current

business analysis, post RDR analysis and post bans analysis

The contents of Business Model Analysis section is shown below

Sub-section Description of contents

Business model

set up

• Objectives and framework of the business model analysis

• Data collection approach and data structure

• Data treatment assumptions

Current business

analysis

• Overview of platform revenue and cost components

• Revenue, costs and profit overview of current platform business models

Post RDR analysis

• Market assumptions for the post RDR analysis

• Post RDR introduction and key challenges

• Definition of RDR counterfactual scenarios

• Overview of RDR implementation costs and operational challenges

• Revenue, costs and profit overview of business models post RDR

Post bans analysis

• Post ban introduction and assumptions for the post ban analysis

• Overview of ban implementation costs and operational challenges

• Profit projection of business models post ban and break-even analysis to assess the business viability post ban

• Sensitivity analysis on key assumptions

Analysis summary • Summary of the current, post RDR and post ban business analysis

Introduction

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Business Model Set-up Business Model Analysis

87

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Introduction 85

Business Model Set-up 87

Current Business Analysis 91

Post RDR Analysis 97

Post Bans Analysis 108

Key Conclusions 126

Competition Analysis 128

Appendices 179

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The Business Model Analysis examines the economic and financial structure of existing

business models and assesses how these might be impacted by both wider RDR changes and

the bans. It also assesses the possible costs of implementing the bans and evaluates the timings

for the ban implementation Business model framework

Business Model Analysis

88

Current market Business Model Analysis

• The main sources of revenue for platforms

and the variation across business models

• The different platforms‟ cost elements (IT,

people, etc) and the percentage of total costs

they present

• Cost structures across different platform

business models in terms of fixed costs vs.

variable costs

• Profits across business models and the main

drivers of profitability (Size, Business model,

Maturity/Age of platform)

Post RDR Business Model Analysis

• The main rule changes related to RDR

• The potential impact on the behaviours of

platforms, advisors, consumers and fund

managers

• The likely changes that would need to be

made by platforms to become RDR compliant

• The key related cost implications for platform

service providers (both one-off and ongoing

costs)

• The impact on sources, levels and structure

of revenues in a post RDR environment

across the advised and non-advised sectors

• The impact of the RDR on the overall

profitability of the different platform business

models

Post bans Business Model Analysis

• The key changes platforms will need to make

to be ready to facilitate a removal of rebates

(incremental to the RDR)

• The likely incremental cost implications for

the different business models (both one-off

and ongoing costs)

• The impact on sources, levels and structure

of revenues across the advised and non-

advised sectors

• Potential response of platforms business

models to ban on fund rebates

• The impact on profitability considering

different potential scenarios (sensitivity

analysis)

• The feasible timeline for platforms to

implement the bans

A framework has been defined to meet each of the Business Model Analysis objectives. In order to isolate the incremental impact of banning rebates on platform

profitability, three different scenarios have been considered. There are (1) the current market where the analysis aims at understanding the main dynamics driving

platforms‟ profitability, (2) the post RDR world where RDR operational implications are identified and their potential impact on platform business models and

financial performance is projected, and (3) the post bans environment where the incremental impact of banning rebates on platform business model profitability is

assessed.

1 3 2

Business Model Set-up – Framework

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Analysis of the introduction of rebate bans on the platform market ©2012 Deloitte LLP – private and confidential

Requested financial figures

Revenues Costs

Core Platform Revenues Operating costs

Fund/ Product

Managers Investors

Ancillary

Services

• Administration

fees

• Rebates

• “Product shelf”

fee

• Initial fee

• Platform fee

• Switching fees

• Re-registration

fees

• Cash account

interest

• Investment

returns

• Additional tools

and services

Fixed Costs

• IT

• People

• Property, plant &

equipment

• Other back-office

functions

Variable costs

• IT

• People

• Customer rebates

• Sales & marketing

• Other

RDR/ rebate bans

related costs

• System

development

• Additional ongoing

costs

• Other costs

• Earnings before interest,

tax, depreciation and

amortisation (“EBITDA”)

• Earnings before interest

and tax (“EBIT”)

• Net income

Profit

Business Model Set-up – Data collection approach Business Model Analysis

89

A data collection exercise has been performed across a sample of platform providers,

representing a range of platform business models, to meet the objectives of the Business

Model Analysis Data collection approach

A key activity undertaken to support the business model analysis was a programme of data collection among platform service providers.

A sample of 8 platform providers was agreed with the FSA and they were asked to provide data for the purpose of the analysis.

Each of these platforms was asked to provide:

A detailed breakdown of operating revenue and cost sources (as presented in the table below), as at the end of FY 2010;

Their view on how the RDR changes might impact each of the profit and loss (“P&L”) elements in the future; and the one-off and ongoing costs which were

expected to be incurred to comply with new requirements;

An assessment on the incremental impact of banning fund manager and cash rebates on profitability;

Their view on the costs (both one-off and ongoing) of implementing the rebate bans.

Key data collected from platform service providers

Note: (1) A list of participating companies can be found in appendix 1, (2) a table detailing the information requested from platform service providers can be found in appendix 2

In the time available, the platform providers were not able to provide a complete response to the data request. Consequently the data analysed in this section has in

some areas been aggregated in order to facilitate the analysis. Furthermore, it is important to emphasise the cost allocation between cost categories and between the

fixed and the variable costs have been validated.

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Business Model Analysis

90

Nr Data challenges Assumptions taken Rationale Caveats

1 Fixed/ variable IT

cost split

Total IT costs are 70% fixed and 30% variable for

platforms insourcing their IT and back-office

administration

Based on other platforms in the sample insourcing

their IT which provided a split between fixed and

variable costs

As IT and people costs

represent most of platform costs,

the estimated split of costs

between fixed vs. variable costs

has a substantial impact on the

exhibition of economies of scale

Total IT costs are 30% fixed and 70% variable for

platforms mostly outsourcing their IT and back-office

administration

Based on platform in the sample outsourcing its IT

which provided a split between fixed and variable

costs

2 Fixed/ variable

people cost split

People costs are 85% fixed and 15% variable Based on platforms in the sample which provided a

split between staff fixed and variable costs and other

Deloitte expert sources

3 Total cost split

when one cost is

provided

Total costs have been split between fixed and variable

costs based on the split provided by other platforms in

the sample (58% fixed and 42% variable)

Based on platforms in the sample which provided a

split between fixed and variable costs

4 Rebates

revenues

Rebate revenues include platform remuneration and

rebates redistributed to customers. Customer rebates

have been included within customer rebate costs,

leaving the total operating profit unchanged

Customer rebate data has been included to obtain a

view on the proportion of fund manager rebates that

are redistributed

5 Business model

assumption

When financial figures relate to two types of business

model, total numbers have been considered to be

related to the most prominent business model (i.e.

Fund Supermarket for CoFunds and Wrap for

Ascentric)

When no separate financial figures were provided

by business models and one business model was

marginal compared to the other, all figures have

been considered related to the overall business

model

This analysis may be distorted

as different business models

comprise different charging and

cost structures

6 Operational one-

off cost

One-off costs (other than RDR and bans related) have

been removed from operational costs

Including one-off costs is misleading for the purpose

of the analysis as they do not concern ongoing

operational costs related to platform activities

7 Total costs cover

multiple business

units

When cost figures were not available at the platform

level but at a divisional level (such as for Standard

Life), these have been estimated based on the

percentage of platform revenue as percentage of

divisional revenues

Platform revenues as percentage of division of

revenues is the best estimate of platform cost as %

of division costs as additional information is not

available

Platform costs may be distorted

by the division of costs

The Business Model Analysis relies on the quality and completeness of data provided by the platforms, which was not validated by Deloitte. In order to undertake

the analysis, a number of assumptions were necessary, and these are set out below. These assumptions were agreed with a small number of platforms.

A set of assumptions have been used, based on the information received, to ensure consistency

of the analysis and comparability between platform business models

Business Model Set-up – Data treatment assumptions

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Current Business Analysis Business Model Analysis

91

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Introduction 85

Business Model Set-up 87

Current Business Analysis 91

Post RDR Analysis 97

Post Bans Analysis 108

Key Conclusions 126

Competition Analysis 128

Appendices 179

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Business Model Analysis

92

Source Item

Range as % of total revenue

Wrap Fund

supermarket Hybrid

Non-

advised

Fund /

product

managers

Admin fees / 0.7% [Redacted]

Rebates 3.4% 74.9%

Product start-up

charges

/ 0.3%

Others / 1.6%

Total 3.4% 77.6%

Investors

Initial fees 3.8% 6.8%

Ongoing platform

fees

80.4% 12.4%

Switching fees 2.3% 0.9%

Exit fees / /

Re-registration fees / /

Others 2.1% /

Total 88.6% 20.1%

Ancillary

services

Cash account interest 6.0% 1.6%

Shareholder inv.

Return

/ 0.7%

Others 2.0% /

Total 8.0% 2.3%

Except for Wraps, all other business models are mostly remunerated through fund manager

rebates. Advised platform costs appear to be mainly fixed, driven by high people and back-

office costs, whilst the non-advised platform appears to have a lower proportion of fixed costs

Current Business Analysis – Overview 1 2 3

Overview of platform revenues (average as % of total revenues)

Source Item

Range as % of total costs

Wrap Fund

supermarket1

Hybrid2 Non-

advised

Fixed

costs

IT maintenance 6.2% 2.8% [Redacted]

Properties, Plant

and Equipment

(“PP&E”)

3.6% 5%

People 40.1% 52.8%

Other back-office

functions

16.3% 17.8%

Total 66.2% 70.2%

Variable

costs

Software 11.0% 1.5%

People 12.3% 8.8%

Sales &

marketing

2.5% 7.4%

Customer rebates 0.1% 3.9%

Other 7.9%

Total 33.8% 29.8%

Overview of costs by business model (average as % of total costs)

Note: 1 Detailed split by cost item has only been provided for one platform for a fund supermarket,

however totals include all sample platforms 2 Detailed cost split has not been provided for the sample hybrid platform

The tables below show the average structure and percentage of revenue and costs for different platform business models

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Business Model Analysis

93

Revenue

20%

Fund

manager

78%

Ancillary

services

2%

Costs

Fixed

costs

74%

Variable

costs

32%

Operating

margin

-6%

EBIT

margin

-8% Customer

Loss

Fund Supermarkets are largely funded through fund manager rebates but, based on the sample,

are unprofitable on average because of high fixed costs and low charges on average

Fund Supermarkets revenues and costs (average)

• Fund Supermarkets offer access to a wide range of funds and products and their

proposition is balanced more towards distribution than adviser administration.

• The top 3 UK platforms by AuA are Fund Supermarkets and account for c. 48%

of the total market share. These platforms were early entrants in the UK market

and today represent £30-40bn AuA per platform provider.

• Fund supermarkets are mainly funded by rebates (75% of revenues) and other

sources of revenues (for example, administration and shelf fees) received from

fund managers.

• Revenues from customers represent direct customer charges comprising mainly

initial, ongoing and switching fees.

• Customer charges are the lowest in the retail market with an average annual

revenue per customer of £113 and an average implied cost of 29bps (based on

average AuA per customer of £38k).

• Other revenues includes bank interest on cash account and fixed income return

on shareholder assets.

• Fund Supermarkets appear to have significant fixed costs (70% of costs) mainly

driven by staff, IT and PP&E costs.

• High people costs (c.54% of total costs) are due to the labour intensive business

model of fund supermarkets where significant resources are mobilised to

manage relationships with advisors.

• Variable costs (30% of total costs) mainly covers staff bonuses, IT software and

licenses and marketing costs.

• Only one fund supermarket in the sample redistributed rebates to customers in

2010, with customers‟ rebates representing 1.3% of fund manager rebates on

average.

• Fund Supermarkets on average operate at a loss (only CoFunds appeared to

make a profit in FY 2010). These models appear to have high people costs (e.g.

revenue per employee of respectively £139k and £83k for CoFunds and

Skandia)

Fund Supermarkets - Overview

Note: (1) Figures represent sample average revenue/ cost, as % of total revenues

(2) Profitability figures are calculated before payment of taxes and cost of capital

Current Business Analysis – Fund Supermarkets 1 2 3

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Business Model Analysis

94

Revenue

89% Fund

manager

3% Ancillary

services

8%

Costs

Fixed

costs

75%

Variable

costs

34%

Operating

margin

-9%

EBIT

margin

-10%

Customer

Wraps revenues and costs (average, as % of total revenue)

Wrap platforms face challenges from typically high fixed costs and low charges per AuA on

average

• Wraps typically offer a wide range of types of products and tax wrappers and

serve the needs of more sophisticated and higher net worth investors and

their advisors.

• Wraps seek to offer a comprehensive administrative proposition to advisers

(and their customers).

• Wraps are typically smaller than Fund Supermarkets in size and represent

about 20% of the total market size by AuA.

• Based on our sample, 89% of revenues primarily come from direct platform

charges to investors and are generated from annual customer platform fees

(mostly based on AUA level).

• Wraps have an average annual revenue per customer of £315, an implied

average charge of 26 bps, and an average AuA per customer of £105k.

• Wraps do not usually receive any rebates from fund managers and directly

charge their fees to investors but some of them may still receive rebates

from a portion of their legacy assets.

• Other revenues are derived from interest on customer cash accounts.

• As is the case with Fund Supermarkets, Wraps appear to have significant

fixed costs (66% of costs) mainly driven by staff, IT and PP&E costs.

• As with other advised platforms, the high staff costs (c.52% of total costs)

are due to the labour intensive business model where significant resources

are mobilised to manage relationships with advisors.

• Variable costs (34% of total costs) mainly cover staff bonuses, IT platform

development and marketing costs.

• High fixed costs and lower average charges appear to be the primary

reasons why these platforms are, on average, unprofitable.

• Only Transact appears to be profitable in FY2010. These models typically

have relatively high fixed costs as a percentage of total revenues (above

80% of revenues for Ascentric and Nucleus and 35% for Transact)

Wraps - Overview

Current Business Analysis – Wraps 1 2 3

Loss

Note: (1) Figures represent sample average revenue/ cost, as % of total revenues

(2) Profitability figures are calculated before payment of taxes and cost of capital

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Business Model Analysis

95

Sample hybrid platform revenues and costs (as % of total revenue)

The revenues of the sample hybrid platform are fully dependant on fund manager rebates.

High levels of fixed costs make it currently unprofitable

• Hybrid platform providers typically are open-architecture offering whole-of-

market investment options (for example, they host the full range of tax

wrappers available) to advised customers.

• Hybrid platforms display features of both Wrap and Fund Supermarket

models as they receive revenues through rebates but these rebates do not

include advisors‟ commissions.

• The size of hybrid platforms is similar to Wrap platforms and currently

usually represent up to £10bn AuA.

• The Hybrid business model is represented in the market by Standard Life,

AXA Elevate and Zurich.

• Hybrid platforms deduct their charges from the rebates they receive from

fund providers and then transfer any remaining rebate to customers

• [Redacted].

• [Redacted].

• As with other advised platforms, fixed costs, [redacted], are high, mainly

driven by staff and other back-office costs.

• Variable costs are mainly driven by variable IT and people costs as well as

the amount of rebates redistributed to customer, [redacted].

• Fixed costs and exclusive reliance on fund managers for revenue appears

to be the main factors that make this platform business model the least

profitable of these sampled.

Hybrid - Overview

Note: (1) Figures represent sample revenue/ cost as % of total revenues

(2) Profitability figures are calculated before payment of taxes and cost of capital

Current Business Analysis – Hybrid 1 2 3

[Redacted]

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Business Model Analysis

96

Sample non-advised platform revenues and costs

• Non-advised platforms offer independent investors, preferring not to access

advice, with direct access to a wide range of funds and investment planning

support tools.

• There are a small number of well established D2C platforms. New entrants

are also responding to the increasing demand for D2C services (with platform

sizes ranging from £3-20bn AuA per platform).

• D2C platforms are currently largely funded by rebates ([redacted]) received

from fund managers.

• Important revenues are also derived from direct charges to customers

through transaction fees, platform charges and initial fees ([redacted]).

• [Redacted].

• [Redacted].

• Fixed costs appear to be lower for D2C platforms than for Fund

Supermarkets both in relative and absolute values, because of a lower

number of employees on average.

• Variable costs represent a higher proportion of total costs for the D2C

platform ([redacted]) because of higher investment in marketing, direct

communication with investors ([redacted]) and higher rebates redistributed to

customers ([redacted]).

• Low fixed costs, important ancillary revenues and high charges make the

sampled D2C platform highly profitable.

Non-advised - Overview

The sampled non-advised platform is mostly funded through rebates and is highly profitable

because of relatively low level of fixed costs, high charges and the diversity of revenue

Current Business Analysis – Non-advised 1 2 3

Note: (1) Figures represent sample revenue/ cost as % of total revenues

(2) Profitability figures are calculated before payment of taxes and cost of capital

[Redacted]

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Post RDR Analysis Business Model Analysis

97

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Introduction 85

Business Model Set-up 87

Current Business Analysis 91

Post RDR Analysis 97

Post Bans Analysis 108

Key Conclusions 126

Competition Analysis 128

Appendices 179

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Business Model Analysis

98

The RDR will bring in important changes to the advisory landscape in addition to the rules in

relation to adviser remuneration and the qualification requirements

Post RDR Analysis – Introduction

New

ad

vis

ory

la

nd

scap

e

Ad

vis

er

rem

un

era

tio

n

Qu

alifi

cati

on

s

• A new definition of Independent Advice will be introduced. Independent Advice is defined as being „unbiased and unrestricted advice based on a

comprehensive and fair analysis of the relevant market‟. In particular, Independent Advice means:

– Breadth not just in terms of provider choice but also in terms of product choice.

– Panels can be used but firms have to demonstrate they are broad enough and current enough „not to materially disadvantage clients‟

• All other advice outside of Independent Advice will be Restricted Advice – this will encompass advice currently labelled as single/multi-tied and basic.

• Advisers will no longer be able to receive commission from product providers but will agree up-front fees with customers.

• Separate disclosure of the cost of advice from the cost of the product is required for all investment advice (Independent and Restricted Advice).

• Adviser charges must reflect the service provided and therefore should not vary according to product provider/type of product.

• Advisers can only charge on-going fees if an on-going service is provided.

• Providers may facilitate the payment of adviser charges through the product but they:

Must obtain and validate the instructions from retail client; and

Must offer sufficient flexibility in the charges they will facilitate.

• All advisers must be qualified to at least QCF Level 4 or equivalent.

• An overarching Professional Standards Board will provide a common framework for professional standards across all advice channels.

• A new code of ethics is to be introduced and monitored by the Professional Standards Board.

• An Annual Statement of Professional Standing for advisers is introduced.

The Retail Distribution Review (“RDR”) rules come into force on January 1st 2013. Some key RDR rules are summarised below in three main areas; rules pertaining

to the new advisory landscape, rules pertaining to adviser remuneration and rules relating to qualification requirements for advisers.

1 2 3

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Business Model Analysis

99

Post RDR scenarios have been developed and a ‘base case’ scenario established for use in the

analysis The potential impact of the ban on rebates must be assessed against the market and contextual environment expected once the known RDR rules have been

implemented, as opposed to the current market environment. This requirement generates challenges, as there is uncertainty over the ultimate impact of the RDR on the

market until a period after the RDR implementation deadline has passed. A scenario approach has therefore been used to assess a range of possible post-RDR

environments. These scenarios have been established based on the potential RDR responses of retail distribution stakeholders (fund managers, platforms and

advisers) and their impact on realised consumer demand for advice. Scenario 4 below, based on the evidence available, is considered to be a reasonable

counterfactual for the analysis. This scenario was tested as part of the programme of stakeholder interviews. The counterfactual scenario has been used to assess the

incremental impact of the bans on platforms in the Business Model Analysis.

Post RDR Analysis – Counterfactual scenario 1 2 3

Providers Modify

Distribution

Although the RDR drives

providers to make some

tactical changes to

distribution, channel

focus for distribution

remains broadly

unchanged

Scenario 3 - Supplier initiatives drive market

growth

IFAs

Most existing customers are willing to pay for advice

IFA sector faces increased competition

Restricted

Vertically integrated restricted advice grows, driven by banks and

insurers

Simplified

Simplified advice is adopted and implemented for the mass

market by a range of providers

Execution-only

Modest growth is achieved in non-advised sales

Scenario 4 - Suppliers seek to develop non-

intermediated propositions

IFAs

Some existing customers of advice are not willing to pay fees. The

IFA sector focuses on wealthier customers

Restricted

Restricted advice achieves some success, focused on wealthier

customers

Simplified

Simplified advice propositions achieve modest success; not

necessarily a cheap proposition serving lower end of market – may

be attractive to all segments

Execution-only

Some providers seek to exploit the resulting market gap by

developing new generation „non-advised‟ propositions

Providers Diversify

Distribution

Product providers seek

to drive through

diversification in

distribution, both to

manage risk and to

reach new customer

groups

Supply Side Response to RDR Positive/neutral Negative Impact of RDR on realised demand for advice

Counterfactual

Scenario 1 - Market modifies and becomes more

efficient

IFAs

Most existing customers of advice are willing to pay for advice

IFA channel continues to dominate investment distribution

Restricted

Some modest growth of DSFs/adviser sales forces, including by

banks

Simplified

Barriers to developing and implementing simplified advice

models considered too great

Execution-only

Non-advised sales remain at existing low levels

Scenario 2 - Market Shrinks

IFAs

Some existing customers of advice (both independent and non-

independent) are not willing to pay fees

IFA sector increasingly focuses on wealthier customers & struggles

to remain financially viable as they seek to replace lost revenues

Restricted

Disclosure of advice charges in the restricted advice sector leads to

lower demand for products from DSFs and banks

Simplified

Barriers to SA considered too significant

Execution-only

Non-advised sales remain at existing levels

Rationale for selecting counterfactual

Consumer research shows some

consumers may not wish to pay

explicit fees

Supply size / industry initiatives to

diversify distribution

Feedback from stakeholder interviews

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Business Model Analysis

100

Disclosure of adviser fees is expected to drive some consumers to satisfy themselves they are

deriving value from services they receive from advisers

Key variations in consumer behaviour

post RDR

Implications Evidence / Source of

information

Those consumers not previously paying

explicit fees become sensitive to the price

of advice / levels of fees charged by

advisers as they become more

transparent

• Although consumers do not tend to shop around for advisers on a fee basis, at least

within the short to medium term post RDR, consumers are likely to be more increasingly

aware that they are explicitly paying for advice services, and will increasingly look to

satisfy themselves that they are receiving value for charges.

• Consumers‟ primary interface in the distribution chain in the advised channel is with their

adviser. Increased price consciousness and sensitivity has the potential to drive changes

in adviser behaviour (see below).

• Stakeholder interview

programme

• FSA research among

platform consumers

• NMG customer research

• Deloitte SME input

An increasing number of consumers

engage with the investment market

through non-advised distribution

• Some consumers are no longer able to access advised services, as advisers consider

them as uneconomical to serve. Others choose not to pay adviser fees once these are

explicitly disclosed. Product providers and platforms are also likely to increase their direct

distribution capabilities and capacity.

• D2C platforms are seen as an attractive channel through which consumers can buy and

manage retail investments without advisers. Therefore overall rates of growth in D2C AuA

are likely to be faster than on advised AuA.

• Stakeholder interview

programme

• Deloitte platform market

model

• FSA research among

platform consumers

• NMG customer research

RDR rule changes, and their potential impact on the distribution landscape as highlighted in the Counterfactual scenario, has the potential to drive changes in

behaviours among key stakeholders in the retail distribution value chain.

Post RDR Analysis – Consumer behaviour 1 2 3

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Business Model Analysis

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Structural changes and disclosure of adviser fees to clients will potentially be key drivers of

changes in adviser behaviour post RDR

Key variations in adviser

behaviour post RDR

Implications Evidence / source of information

Advisers need to demonstrate

their value to customers more

clearly to justify the fees

• Advisers are likely seek to protect their revenues and margins through a range of

strategies.

• Advisers may seek to introduce efficiencies into their businesses to reduce costs

and maintain margins. Platforms can help advisers to achieve this through the

back office and administrative services.

• Advisers are likely to seek to deliver lower charges from upstream in the value

chain – in relation to fund manager, product and platform costs – and these lower

costs are likely to become an important element of the adviser proposition.

• Adviser selection of funds may also be impacted, Advisers may more frequently

select funds with lower charges, such as passive funds, to bring down overall

charges incurred by the consumer.

• Quality and breadth of platform services are likely to remain important criteria for

advisers when choosing a platform, but price (both of platform services and of

funds on the platform) is likely to become of more important in platform selection.

• Large advisory firms are likely to use white labelled platforms to promote their

brand and demonstrate their value added to customers.

• 61% of IFAs agree RDR will lead to

increased professionalism (NMG)

• Stakeholder interview programme

• FSA research among platform consumers

• IFA 2009 Census (NMG)

• The Platforum (August 2011 issue)

New requirements for

independence can lead to

differing adviser approaches in

the market

• Requirements to select across the breadth of products and providers potentially

reinforces the role for platforms in helping advisers meet this requirement.

• Advisers may have incentives to concentrate client investment on their primary

platform, although independence requirements encourage advisers to also use a

small number of additional platforms for clients.

• Some advisers may leave the independent sector. Some may exit the advice

market altogether and others may move across to the restricted advice sector. As

a result, the restricted advice sector will potentially require a different platform

proposition to the independent sector. Similar to some platform propositions that

have already developed in the Australian market.

• Stakeholder interview programme

• Case study of platforms in the Australian

Market

• RS Consulting study (Dec 2011)

suggested that 15% of advisers would

leave the advice market

Post RDR Analysis – Adviser behaviour 1 2 3

RDR rule changes, and their potential impact on the distribution landscape as highlighted in the Counterfactual scenario, has the potential to drive changes in

behaviours among key stakeholders in the retail distribution value chain

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Business Model Analysis

102

Platforms respond to structural changes in distribution, and become under increasing pressure

to deliver a pricing element to their proposition

How platform service providers

behaviour changes after the RDR

Implications Evidence / source of

information

Platforms increasingly seek to compete

on price as well as quality

• Platforms may increasingly offer passive / lower cost funds on their platforms, even

where rebates are not paid.

• Some platforms may seek clean share classes from fund managers to be able to

transparently demonstrate low prices.

• Levels of direct customer platform charges, where these are paid, may reduce from

current levels.

• Some platform providers may seek to drive out cost efficiencies within their own business

as a means of protecting margin. The range and quality of services could theoretically

come under pressure, although a highly competitive market will make it challenging for

businesses to significantly cost engineer.

• Stakeholder interview

programme

Platforms adapt their proposition for

different adviser and consumer markets

• In the advised sector, platforms may develop differing models for the independent and

restricted advice sectors.

• Restricted advice platforms may have a smaller range of funds and wrappers. Some

platforms may seek to drive lower prices from fund managers and product providers by

delivering volume.

• Some platforms currently in the advised market may launch D2C platform propositions

using the same core platform technology.

• Stakeholder interview

programme

Post RDR Analysis – Platform behaviour 1 2 3

RDR rule changes, and their potential impact on the distribution landscape as highlighted in the Counterfactual scenario, has the potential to drive changes in

behaviours among key stakeholders in the retail distribution value chain

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Business Model Analysis

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Emerging price pressure for fund managers may potentially be escalated as a result of the

RDR. Fund managers potentially adopt a range of strategies in response

Key variations in fund manager

behaviour post RDR

Implications Evidence / source of

information

Fund managers continue to come under

increasing pressure in relation to prices

and respond in a variety of ways

• Fund manager rebates to platforms may increase as platforms provide additional

services. Such as facilitating adviser charging, and as the relative market power of

platforms increases.

• Fund managers need to offer a new share class for funds post-RDR to remove the

adviser commission portion of the charge.

• A few fund managers may also offer platforms a clean share class, a share class that

only represents the fund manager fee.

• The increase in share classes required may lead to a consolidation of funds, as a

response to the increased costs of running several share classes for a single fund.

• The emerging trend to reduction in fund manager charges is likely to continue, with lower

prices for some active funds continuing to emerge..

• Stakeholder interview

programme

• Newspapers

• Platforms websites

Fund managers with scale and consumer

brands seek to diversify distribution away

from intermediated sales

• Increasing their footprint across the distribution value chain becomes an attractive

strategy for some fund managers in order to respond to the competitive pressures from

third-party platforms and uncertainty over the future of some parts of the advice market.

• Successful platform strategies are likely to become increasingly important to the success

of fund managers, both in relation to new business and to the retention of legacy back

books.

• In particular, D2C platforms may be developed by those fund managers with scale and

consumer brands.

• Other direct distribution channels are developed by fund managers and life companies

with investment arms.

• Stakeholder interview

programme

Post RDR Analysis – Fund Manager behaviour 1 2 3

RDR rule changes, and their potential impact on the distribution landscape as highlighted in the Counterfactual scenario, has the potential to drive changes in

behaviours among key stakeholders in the retail distribution value chain

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Business Model Analysis

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Business Model Analysis of future market environments assumes changes to the total AuA on

platforms across advised and non-advised platforms Platform assets growth projection 2011 - 2014

Key market assumptions for post RDR analysis

Source: IMA, FSA, ONS, CityUK, Deloitte analysis

AU

A(£

bn

)

0

100

200

300

400

500

2011 2012 2013 2014

Nr Assumptions taken Rationale Caveats/ Considerations

1 Advised platform AuA is expected to

grow at CAGR of 21% from 2011 to

2014

The advised market annual grew at a 16% CAGR between 2003 and 2010. As AuA

transfer on platform is highly likely to accelerate as a result of a number of drivers and the

RDR, additional 5% growth is projected in the counterfactual scenario.

• Price levels may change as a

consequence of RDR and therefore

influence the total amount of

revenue.

• Fixed costs in practice are unlikely

to remain constant in the presence

of significant changes in total AuA

on platforms.

• Revenue projections (where AuA

growth is a key driver) have

significant impact the ability of

platforms to absorb RDR costs and

therefore influence future

profitability estimates.

Non-advised platform AuA is

expected to grow at CAGR of 71%

during the same period

Major players in the non-advised market have all showed rapid AuA growth in recent

years (e.g. HL‟s total AuA has increased by 43% in 2010 relative to 2009, Barclays

Stockbrokers has achieved 150% AuA growth during tax year 2008/2009T) and

considering D2C market will grow to 10% of total platform market in 2013, the

counterfactual scenario indicates an annual growth rate of 71%.

2 Platform revenue and variable costs

are assumed to grow at the same

rate as AuA growth, while ancillary

revenue and fixed costs are

considered unaffected

Ancillary revenues and fixed costs are assumed to remain constant, as by definition, they

are assumed to be independent of AuA growth.

AuA growth is the main source of revenue growth across business models as both

rebates and most of client charges paid directly to the platform are directly related to AuA.

3 RDR one-off costs are assumed to

be fully incurred in 2012 and RDR

ongoing costs start as of 2013

Under RDR rules applicable from 31/12/2012,as a result all companies are likely to incur

one-off costs before that date in order to be fully compliant. Ongoing costs will be incurred

annually from 2013 as a result of the additional RDR requirements.

• Timing based on FSA deadline.

4 Profit figures considered are

EBITDA margin

The sample platforms analysed are at different stages of their life cycle/ evolution. Gross

operational profit has been considered excluding set up costs to ensure consistency in the

analysis.

• More recent entrants may have

depreciation costs affecting their

profitability.

Post RDR Analysis – Introduction

• For the purpose of the post RDR and post bans Business Model Analysis,

assumptions have been taken regarding the projection of total AuA on platforms.

• These assumptions in relation to projections of AuA on platform consider an

annual growth of 24% from 2011 to 2014

• Advised platforms‟ AuA are considered to be growing by 21.3% per year and

non-advised AuA are assumed to be growing by 71% per year

• These assumptions are:

Output from an indicative model of the retail investment market built by

Deloitte;

Confirmed by market evidence as presented in the table below.

1 2 3

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Business Model Analysis

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RDR key costs and operational challenges

While Fund Supermarkets need to undertake important changes to cope with RDR disclosure

and advisor remuneration requirements, the direct impact on other platform business model is

limited

• Platforms completing the data template support the Business Model Analysis were asked to estimate their costs of complying with RDR requirements. As there is a

relatively short timescale prior to the RDR implementation date (31st of December 2012), platforms may have some prior estimates of these costs. However, the

data provided has not been validated.

• No operational changes are required for non-advised platforms as they fall outside the scope of RDR.

• Costs relating to the implementation of RDR requirements primarily cover:

One-off IT system changes required to meet additional reporting requirements, provide information to customers, facilitate advisor fees and facilitate additional

share classes

Additional ongoing administration costs due to FSA requirements (including facilitation of advisor charging, client notification, re-registration, share class

support)

Post RDR Analysis – Implementation costs

Operational challenges and timing of implementation

• Fund supermarkets have important RDR implementation costs as they will

have to implement a solution to facilitate advisor charging

• Costs are primarily IT development and administration costs in terms of

product unbundling, re-registration, finance integration, and disclosure

Cost

type

Business

model Cost range

One-off

cost £8.1- 16.7m

Ongoing

cost £2.8- 3.5m

Fund

supermarkets

One-off

cost £0 -1.25m

Ongoing

cost £0- 310k

Wraps

One-off

cost £15-20m

Ongoing

cost £ 0

Hybrid

• No significant one-off platform changes are required for Wraps as their

business model is already largely aligned with RDR requirements

• Small on-going costs are expected relating to regulatory reporting and client

communications

• The sample Hybrid platform expects to incur significant one-off costs for RDR

IT related changes, mainly covering adviser charging, unbundling of pricing

and reducing functionality

• No ongoing costs increase has been anticipated post RDR

Timing of implementation

• All platforms completing the

data template are already

undergoing changes to cope

with new requirements and

plan to be ready before

December 2012.

1 2 3

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Business Model Analysis

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The analysis suggests that the RDR will affect Fund Supermarket business models the most,

the impact on profit is sensitive to fixed costs and revenue projections

Key impacts on fund supermarket model post RDR

• Fund supermarkets have significant RDR implementation costs, these

comprise £8-16m set up cost and £1-3.5m ongoing cost.

• Projected market growth may help Fund Supermarkets balance these costs

and their relatively high fixed costs and improve profitability in 2012.

Fund supermarket model profit projection - Post-RDR (average)

% of revenue Source of revenue / costs

Revenue

99%

Ancillary

services

1%

Costs

Fixed

costs

51%

Variable

costs

32%

Operating

margin

4%

AuA

related

Profit RDR

one-off

costs

13%

Revenue

99%

Ancillary

services

1%

Costs

Fixed

costs

42%

Variable

costs

32%

Operating

margin

24%

AuA

related

Profit

RDR on-

going

costs

2%

2012 with RDR one-off costs 2013 with RDR on-going costs

Sample non-advised model profit projection – Post RDR

Note

1. Results presented on this page represent the static view based on the first round

analysis. Business outlooks may change as a result of changes of market share or

growth

Key impacts on non-advised model post RDR

• No operational changes are required for non-advised platforms as they fall

outside the scope of the RDR.

• Increased profitability is projected for D2C platforms in the post RDR market

due to the increasing demand for D2C services and the resulting AuA

increase, but in practice additional new entrants are likely to temper profit

margins.

Post RDR Analysis – Profit projection 1 2 3

[Redacted]

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The initial analysis suggests that the impact of the RDR on Wrap and Hybrid models is likely

to be limited but this result is subject to fixed costs and revenue projections Key impacts on wrap model post RDR

• No significant changes are required for Wrap platforms to cope with RDR

requirements as their business model is already largely aligned.

• The relatively low cost of implementation (£0-1.3m) is mainly related to the

additional reporting requirements and disclosure to clients.

• The analysis suggests that wraps could become profitable post RDR due to

projected market growth of platform market, if charges are maintained and

subject to the fixed cost assumptions.

Revenue

94% Ancillary

services

6%

Costs

Fixed

costs

51%

Variable

costs

35%

Operating

margin

11%

AuA

related

Profit

RDR

one-off

costs

1%

Revenue

95% Ancillary

services

4%

Costs

Fixed

costs

42%

Variable

costs

32%

Operating

margin

20%

AuA

related

Profit

RDR on-

going

costs

1%

2012 with RDR one-off costs 2013 with RDR on-going costs

Wrap model profit projection – Post RDR (average)

Hybrid model profit projection – Post RDR Key impacts on sample Hybrid model post RDR

• The Hybrid platform expects a significant one-off IT investment related to

complying with the RDR requirements.

• Only nominal on-going costs are anticipated post RDR, which help the hybrid

platform improve its profitability outlook in 2013.

• The sample hybrid platform is likely to become profitable later than Wrap

platforms as it is currently highly unprofitable and its RDR costs for it are

significant.

1 2 3

% of revenue Source of revenue / costs

Note

1. Results presented on this page represent the static view based on the first round

analysis. Business outlooks may change as a result of changes of market share or

growth

Post RDR Analysis – Profit projection

[Redacted]

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Post Bans Analysis Business Model Analysis

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Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Introduction 85

Business Model Set-up 87

Current Business Analysis 91

Post RDR Analysis 97

Post Bans Analysis 108

Key Conclusions 126

Competition Analysis 128

Appendices 179

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Post Bans Analysis – Introduction

• The FSA proposal to ban fund manager rebates to platforms and cash rebates to customers is likely to lead to alignment in remuneration structures across all

platform business models.

• All platforms will be paid directly by investors for services received, and this is likely to be facilitated through their cash accounts.

• Cash rebates to investors will banned but unit rebates permitted under the current proposed rule.

• The following pages cover:

The operational changes, implied costs and timing implications that platform services providers will face to comply with the bans

The net impact of banning rebates on platforms‟ profitability (by removing rebate revenue and cash rebates paid)

The analysis of the average bps to be charged to investors to break-even and recover to estimated pre-ban profitability

Sensitivity analysis highlighting the potential impact of the bans, given a set of potential scenarios

Post-ban business model assumptions

The proposed introduction of rebate bans will change the remuneration structure of Fund

Supermarkets, Hybrid and non-advised platforms, leading to revenue uncertainty

Impact on platform business models

Nr Assumptions taken Assumptions Caveats

1 Post ban revenue growth

projection

See post RDR assumptions section for details of market growth assumptions

The rebate ban has been assumed to be implemented as at 31/12/2013 and

therefore FY 2014 figures do not include any rebates.

• Price levels may change as a consequence

of rebate bans and therefore influence the

total amount of revenue.

• Fixed costs do not remain constant in the

presence of significant changes in the total

AuA on platforms.

• The timing of the bans implementation

affects the ability of platforms to absorb

implementation costs.

• The above mentioned considerations are

covered as part of the sensitivity analysis.

Post-ban cost

assumptions

Post RDR fixed costs have been assumed to remain constant.

Post-RDR variable costs have been assumed to grow at the same rate as

revenue. Customer cash rebates have been excluded from variable costs.

2 Rebate ban costs – non-

advised platform

A rebate ban cost for the non-advised platform of £8m one-off costs and £2m

ongoing costs has been assumed, based on interview feedback and other

platforms costs in the sample

3 Timing of costs Rebate ban one-off costs have been assumed to be fully incurred in 2013, while

rebate ban ongoing costs beginning as of 2014.

4 Profit figures considered

are EBITDA margin

The sample platforms analysed are at different stages of their life cycle/ evolution.

Gross operational profit has been considered excluding set up costs to ensure

consistency in the analysis.

• More recent entrants may have depreciation

costs affecting their profitability.

1 2 3

• The following assumptions represent the “base case” assumptions for the assessment of rebate bans impact

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Business Model Analysis

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Rebate bans key costs and operational challenges

IT redesign efforts are required to implement rebate bans and, except for non-advised

platform, implementation is estimated to range between 3 and 18 months by the platforms

• The costs related to the rebate ban outlined by the platforms in their responses mainly concerned:

One-off IT implementation costs related to system redesign, segregation of assets, share classes launch and unit rebate implementation; and

Additional ongoing costs covering unbundled charging management, marketing, communication and unit rebates management.

• Most platforms do not currently offer unit rebates or do so only for a small portion of their customer base. The cost of implementing unit rebates depends to a

significant extent on the type of solution chosen. A possible solution identified by interviewees is for unit rebates to be provided in cash to the platform and then

reinvested in units based on the investor risk profile. Other operational concerns relating to the implementation of unit rebates concern the management of legal and

CGT issues.

• Based on sample platform providers, unit rebates implementation costs are estimated to £200k-£1m one-off system cost and £0-200k ongoing

• The timescale believed to be required, by the sample, to implement the ban varies considerably by platform business model:

12 to 18 months for Fund Supermarkets

3 to 6 months for Wraps

12 months for sample hybrid platform

2 to 4 years for the sample non-advised platform.

• The rebate ban will, if implemented, take place at the same time as other regulatory reforms (RDR, Mifid 2, Solvency 2, Basel 3, IFRS 9, etc), therefore some

organisations may suffer from a lack of dedicated resources to manage internal projects

• Other adjacent markets captured by the platform definition (i.e. c.15 % of ISA managers enabling investment in funds from more than one fund provider and

execution-only brokers) will also encounter costs regarding new ban requirements (e.g. Around £10k1 per ISA manager)

Post Bans Analysis – Implementation costs and challenges 1 2 3

Note: 1 Estimate provided by TISA representatives during the interview process

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Business Model Analysis

111

Cost

type

Business

model Cost range Operational challenges

Timing of

implementation

One-off £0.2-4.1m

Ongoing £0.1-2.3m

Fund

supermarkets

• One-off costs are for c.70% related to IT costs (almost equally distributed between unit

rebates implementation, segregation of assets, unbundling of fees and share class launch)

• Other one-off costs are mainly related to contract renegotiation with fund managers and

communication to customers

12 to 18 months

on average

One-off £0-500k

Ongoing £0

Wraps • The Wrap platforms do not expect significant costs associated with complying with rebate

bans since their remuneration model will not be affected. Costs are mainly related to unit

rebates implementation

3 to 6 months on

average

Ongoing £450k

Hybrid • The Hybrid platform expects to invest a minimum of £1.5m to move from cash to unit

rebates from fund managers, and a maximum of £4m including re-work of semi-bundled

pricing and large fund discount mechanisms

One-off £1.5-4m

12 months

One-off £4-20m

Ongoing £0

Non-advised

• Costs of implementing rebate bans will largely depend on whether existing systems can

be upgraded or whether substantial changes or a new system is required (as reflected in

the upper end of the cost range provided). It is noted that costs of this level are

approaching costs of new entry. Implementation costs could be significant because of high

IT investment, senior management time and focus, lack of dedication on other commercial

opportunities, etc

• The cost estimates provided by the sample non-advised platform represent a sizeable

range of potential costs.

2 to 4 years

• A sample of platforms were requested to provide estimation of the costs of implementing the rebate bans. However responses provided to Deloitte, did not in most

cases, break down these cost estimates across the cost of implementing unit rebates, share classes and other costs.

• The costs provided by the platforms and presented below have been reviewed but not validated.

• These rebate bans implementation costs typically represent c.1-2 bps (of total platform AuA).

1 2 3

Significant implementation costs for the bans are expected by Fund Supermarkets, the Hybrid

and non-advised platforms

Post Bans Analysis – Implementation costs and challenges

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Business Model Analysis

In addition to the initial costs of implementing unit rebate technology, the stakeholder

interviews raised a number of concerns about the additional ongoing cost and complexity of

unit rebates

Concern Description

Additional administration cost for platform • The additional administration cost for unit rebates relates to cost of re-distributing the aggregated amount of

units it receives from each fund to individual customers. A number of platforms state that the same

reconciliation process for cash payments is simpler to administer.

Increased likelihood of error due to the complexity of

reallocating units

• Some platforms have stated that, as they believe the redistribution of units to be more complex, there is likely to

be high potential for errors to occur, when allocating the correct number of units to each customer.

Cash account depleted which will lead to unit

encashment

• Some interviewees suggested that without cash rebates entering the customer‟s cash account, then customers

may end up encashing the unit rebates in preference to writing separate cheques in order to meet platform and

adviser charges.

• Platforms have raised the concern that if unit rebates are encashed in order to provide liquidity to the cash

account, then this may trigger a capital gains tax (“CGT”) liability. For each unit encashment a CGT calculation

will be required to be shown on the customer‟s quarterly or annual statement. Multiple encashments will be

complicated for the customer to understand and increase the length of the statements.

Client reimbursed with units of an investment they

have sold down

• Some platforms were uncertain as to whether when a client sells down units to exit an investment, they would

still be able to get the payment in cash. There may be instances where rebates are received after the initial

payment that would be paid in units. This may lead to a position where the customer receives rebates in units

of the investment that the customer was seeking to exit.

The table below highlights the concerns a number of the platforms and fund managers raised during the interview process, in relation to the operational

challenges of implementing unit rebates functionality:

Source: Interview feedback

1 2 3 Post Bans Analysis – Implementation costs and challenges

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• Charging level indicators are used in the following Business Model Analysis to assess the impact of rebate bans on the different platform business models.

• Each indicator aims at providing information about the charging level that may need to be achieved by platforms in a post ban environment.

• The different indicators used are as follow:

Business Model Analysis

113

Profit projection and sensitivity analysis indicators

Indicators Description

Post ban bps charge to break even (direct)

• Required direct bps to charge to customers in a post ban environment in order to break even

• The break even point is the bps charge level at which total costs equal total revenues, and platforms

experience neither gain nor loss

Post ban bps charge to match pre ban

(post RDR) profit margin (direct)

• Required direct bps to charge to customers in a post ban environment to reach the same profit margin

as modelled in the post RDR analysis in the precedent pages

Post ban bps charge to reach 10% profit

margin (direct)

• Required direct bps to charge to customers in a post ban environment to reach an indicative 10%

profit margin

• The 10% operating margin is indicative only, to provide a view on additional bps required to move from

break even to profit. Deloitte has not researched expectations of profit levels across different business

platform models

2010 bps customer charge (implied costs

to customers)

• Total implied platform charges to customers in FY2010

• Implied charges are total platform revenues divided by total AuA. They include charges paid by

customers through both direct platform charges (initial fee, transaction fee, etc) and fund rebates

2010 bps customer charge (direct)

• Total direct platform charges to customers in FY2010 (rebates excluded)

A set of key metrics and indicators are used across the profit projection and sensitivity analysis

in order to assess the impact of the different assumptions on platforms’ profitability and

charging levels

Post Bans Analysis – Analysis framework 1 2 3

• The “Profit projection” slides aim at providing insight on the different potential level of charging required in a post ban environment, considering the base case

assumptions (see “Post ban analysis – Introduction”).

• The sensitivity analysis section assesses the impact of alternative assumptions, described in the sensitivity analysis introduction slide, compared to the base

case analysis. “Difference from base analysis” in the sensitivity analysis section therefore highlights the difference, both in absolute and relative value, in bps

charges compared to the base scenario.

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Business Model Analysis

114

Fund Supermarkets will need to change their revenue sources and collection mechanisms post-

ban by significantly increasing direct charges from customers

Key impacts on Fund Supermarkets post ban

• The scope of RDR one-off implementation of Fund Supermarkets include

unbundling charging and business model review, which will facilitate the

change to implement the rebate ban.

• Ongoing rebate ban costs are significantly less than the RDR implementation

costs.

• Fund Supermarkets‟ revenue will be significantly impacted by the ban as

rebates represent c.75% of their current revenue.

• Fund Supermarkets will therefore need to replace revenue loss from the rebate

ban by charging customers explicit fees.

Fund supermarket model profit projection - Post-ban (average)

2013 with ban one-off costs 2014 with ban on-going costs

Revenue Costs

95%

Ancillary

services

5%

Fixed

costs

174%

Variable

costs

137%

Operating

margin

-226%

AuA

related

Loss

RDR on-

going

costs

10%

Ban on-

going

costs

5%

Revenue

99%

Ancillary

services

1%

Costs

Fixed

costs

42%

Variable

costs

32%

Operating

margin

21%

AuA

related

Profit

RDR on-

going

costs

2%

Ban one-

off costs

2%

2014 break-even analysis

Post ban

bps

bps gap

to break-

even

2010 total

bps

bps gap

to match

pre-ban

margin bps gap

to match

2010

margin

8

2010

direct

customer

bps

33

9

14

21

13

Post-ban business viability / „break-even‟

• Fund Supermarkets‟ existing revenue will be significantly impacted by the

bans. In order to break-even, fund supermarkets need to increase their direct

customer charges by nearly threefold (from 8 to 23). However, the break-even

charging level is still less than the current implicit customer charges.

• Fund Supermarkets will need to increase their direct customer charges to

30bps, which is lower than their current average implied bps per customers (33

in 2010) in order to achieve the pre-ban operating margin. But these results

are sensitive to assumptions of fixed costs and revenue growth.

• If the implied bps currently received remain unchanged from 2010 levels, Fund

Supermarkets (which are currently unprofitable, on average) will require an

average annual AuA growth of 6.6% in order to break-even in 2013.

Note: assuming no additional direct customer

charges to compensate the rebate loss

Note: pre-ban margin refers to 2013 margin

without taking into account one-off ban costs

Post Bans Analysis – Profit projection – Fund Supermarkets 1 2 3

% of revenue Source of revenue / costs

2014 profit indicators

2010 bps customer charge

(implied costs to customers) 33

2010 bps customer charge

(direct) 8

Post ban bps charge to

break even (direct) 23

Post ban bps charge to

match pre ban (post RDR)

profit margin (direct)

30

Post ban bps charge to

reach 10% profit margin

(direct)

26

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Business Model Analysis

115

The impact of the bans on the Wrap platforms is likely to be relatively modest and the

Business Model Analysis based on the assumptions shows that their average profit margin

could increase post-ban

Key impacts on the wrap model post ban

• Wrap platforms are not significantly impacted by the bans as their business

model is already aligned with most of the requirements.

• Rebate ban implementation costs are primarily related to the cost of

implementing unit rebates.

• Wraps‟ operating margin could continue to increase after the ban

implementation driven by AuA/revenue growth. But this is dependent on the

fixed costs and AuA market growth assumptions.

Wrap model profit projection – Post ban (average)

2013 with ban one-off costs

Revenue

96% Ancillary

services

6%

Costs

Fixed

costs

47%

Variable

costs

27%

Operating

margin

14%

AuA

related

Profit

RDR on-

going

costs

1%

Ban one-

off costs

1%

2014 with ban on-going costs

Revenue

95% Ancillary

services

5%

Costs

Fixed

costs

40%

Variable

costs

37%

Operating

margin

23%

AuA

related

Profit

RDR on-

going

costs

1%

Ban one-

off costs

1%

Note: assuming no additional direct customer

charges to compensate the rebate loss

2014 break-even analysis

Post ban

bps

bps

surplus to

break-

even

2010 total

bps

bps

surplus to

match

pre-ban

margin

bps

surplus to

match

2010

margin

2010

direct

customer

bps

34 32 32 12 4 11

Note: pre-ban margin refers to 2013 margin

without taking into account one-off ban costs

Post-ban business viability / „break-even‟

• Wrap platforms should not suffer from the ban since their revenue sources will

largely not be affected post-ban.

• The analysis suggests that Wrap platforms will have a higher operating margin

than pre-ban, which enables them to absorb the potential price pressure from

advisers or use price incentives to increase market share.

• If the implied bps remain unchanged from 2010 levels, Wraps (which are

currently unprofitable on average) will require an average annual AuA growth

of 9.9% in order to break-even in 2013.

Post Bans Analysis – Profit projection – Wraps 1 2 3

% of revenue Source of revenue / costs

2014 profit indicators

2010 bps customer charge

(implied costs to customers) 34

2010 bps customer charge

(direct) 32

Post ban bps charge to break

even (direct) 22

Post ban bps charge to match

pre ban (post RDR) profit

margin (direct)

30

Post ban bps charge to reach

10% profit margin (direct) 25

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Business Model Analysis

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Hybrid model profit projection – Post ban (average)

2013 with ban one-off costs 2014 with ban on-going costs 2014 break-even analysis

Similar to the Fund Supermarkets, the Hybrid platform will be significantly impacted by the

bans and will need to change their remuneration mechanisms post-ban to break even or

maintain pre-ban profit margins

Key impacts on the sample hybrid model post ban

• The incremental rebate ban costs are less than the RDR implementation costs

as the Hybrid platform is already preparing itself under RDR for a potential

rebate ban implementation (unbundling charging, business model review, etc)

• Based on the sampled platform‟s data, the Hybrid platform‟s revenue will be

highly impacted by the ban - [redacted].

• Consequentially, the hybrid platform will need direct customer interactions to

manage customer charges.

Post-ban business viability / „break-even‟

• The Hybrid platform will be the most affected by the ban due to its pure rebate

revenue model. In order to break-even, the hybrid platform will need to directly

charge customer at average 29 bps, [redacted].

• It will be challenging for the Hybrid platform to recover to the pre-ban operating

margin in the short term due to the significant required increase in bps charged

charging directly from customers relative to the current (2010) level. This

analysis is dependent on the fixed costs and AuA market growth assumptions.

• If the implied bps remain unchanged from 2010 levels, the Hybrid platform will

require an average annual AuA growth of 7.8% in order to break-even in 2013.

Post Bans Analysis – Profit projection – Hybrid 1 2 3

% of revenue Source of revenue / costs

2014 profit indicators

[Redacted]

[Redacted] [Redacted] [Redacted]

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Business Model Analysis

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The non-advised platform is likely to be able to absorb the impact of the bans due to a

diversified charging structure and rapid D2C growth

% of revenue Source of revenue / costs

Non-advised model profit projection – Post ban

Key impacts on the non-advised model post RDR

• Rebate ban implementation costs are the highest within the industry in

absolute terms but are relatively low in relation to the size of the platform

revenue.

• Banning rebates impacts D2C platforms‟ profitability - [redacted].

• However, due to other sources of revenue (transactional fee, annual platform

fee, cash account interest) and rapid D2C growth, D2C platforms are likely to

be able to absorb rebate ban impacts.

2013 with ban one-off costs 2014 with ban on-going costs 2014 break-even analysis

Post-ban business viability / „break-even‟

• Even though the non-advised platform will be affected by the bans due to the

loss of revenue directly from the platform rebate, their business viability may

not become an immediate concern due to their high pre-ban margin.

• However, it may be difficult for the non-advised platform to match their pre-ban

operating margin by replicating revenues from rebates with charges directly

from customers without significant investment in marketing or enhanced

communications on their value proposition.

Post Bans Analysis – Profit projection – Non-advised 1 2 3

2014 profit indicators

[Redacted]

[Redacted] [Redacted] [Redacted]

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Business Model Analysis

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Post-ban business model assumptions

Nr Assumption Scenario Description Rationale for scenario

1

Post ban revenue

growth projection

assumption

High growth scenario

• Increase the advised platform AuA growth rate assumptions

from 21% in the base analysis to 28%

• Increase the non-advised platform AuA growth rate assumptions

from 71% in the base analysis to 92%

Higher AuA growth level per platform

Mid growth scenario

• Decrease the advised platform AuA growth rate assumptions

from 21% in the base analysis to 14%

• Decrease the non-advised platform AuA growth rate

assumptions from 71% in the base analysis to 50%

Mid AuA growth level per platform could occur

as a result of new entrants or lower than

expected growth

Low growth scenario

• Decrease the advised platform AuA growth rate assumptions

from 21% in the base analysis to 7%

• Decrease the non-advised platform AuA growth rate

assumptions from 71% in the base analysis to 25%

Low AuA growth level per platform could

occur as a result of significant competition

2 Post-ban cost

assumption

Fixed costs increase

scenario

• Fixed costs increase scenario assumes an increase of 10% in

fixed costs increase per year

Some fixed cost components could increase

with the increase of the size of AuA

3 Timing of the bans

assumption

Early introduction

scenario

• Early scenario assumes the ban will be effective on 31

December 2012

Possibility of introducing the bans later

Late introduction

scenario

• Late scenario assumes the ban will be effective on 31

December 2014

Possibility of introducing the bans earlier

Sensitivity analysis is used to further demonstrate how key assumptions affect the post-ban

Business Model Analysis results

• The post-ban assumptions have been used in the analysis to form a base case view of the impacts of the bans.

• The key areas of sensitivity analysis are described below:

Post Bans Analysis – Sensitivity Analysis – Introduction 1 2 3

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The high AuA growth rates slightly improve the post-ban business viability and operating

margin recovery

Assumption on AuA growth rate:

• The base analysis assumes 21% AuA and revenue growth rate for advised platforms and 71% AuA growth rate for the non-advised platform.

• High growth scenario assumes 28% AuA and revenue growth rate for advised platforms and 92% AuA growth rate for the non-advised platform.

Summary of high growth rate sensitivity analysis:

• Advised platforms would need to directly charge between 20 and 25 bps to customers to break even in this scenario – this represents a lower bps level

than the implied costs to customers currently (if total AuA is divided by total revenues)

• All platforms could reduce their bps charges from current levels and still be operating profitably.

1 2 3

2014 business sensitivity indicators

Revenue from customers (bps) Difference from base analysis

Fund

super-

market

Wrap Hybrid Non-

advised

Fund

super-

market

Wrap Hybrid Non-

advised

Post ban bps charge to break even (direct)

21 20

[Redacted]

-2 (-9%) -2 (-9%)

[Redacted] Post ban bps charge to match pre ban (post

RDR) profit margin (direct) 30 29 0 -1 (-3%)

Post ban bps charge to reach 10% profit

margin (direct) 23 22 -3 (-11%) -3 (-12%)

2010 bps customer charge (implied costs to

customers) 33 34

2010 bps customer charge (direct)

8 32

Post Bans Analysis – Sensitivity Analysis – High growth scenario

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Business Model Analysis

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In the mid growth scenario, some advised platform models will need to retain charging levels

(or implied charges) at 2010 levels to be profitable

Assumption on AuA growth rate:

• The base analysis assumes 21% AuA and revenue growth rate for advised platforms and 71% AuA growth rate for the non-advised platform.

• The mid growth scenario assumes 14% AuA and revenue growth rate for advised platforms and 50% AuA growth rate for the non-advised platform.

Summary on growth rate (mid) sensitivity analysis:

• Fund Supermarkets in this scenario will need to charge direct bps at a similar level to the current total implied charges (dividing total AuA by total

revenue) in order to generate 10% profit margin.

• The non-advised platform needs to charge at 9bps to beak even, and at 10 bps to make a 10% profit margin, significantly lower than the current implied

charges

• Fund Supermarkets and the non-advised platform will need to rely on their ability to increase direct charges to customers through better customer

propositions and communications.

• The Wrap platform will generate profit margins above 10% if they retain charges in the same region as current charges.

• In comparison with the base analysis, the total post-ban AuA platform revenue across business models in the mid growth scenario decreases by 32%.

1 2 3

2014 business sensitivity indicators

Revenue from customers (bps) Difference from base analysis

Fund

super-

market

Wrap Hybrid Non-

advised

Fund

super-

market

Wrap Hybrid Non-

advised

Post ban bps charge to break even (direct) 27 25

[Redacted]

+4 (17%) +3 (14%)

[Redacted] Post ban bps charge to match pre ban (post

RDR) profit margin (direct) 31 30 +1 (3%) 0

Post ban bps charge to reach 10% profit

margin (direct) 30 28 +4 (15%) +3 (12%)

2010 bps customer charge (implied costs to

customers) 33 34

2010 bps customer charge (direct) 8 32

Post Bans Analysis – Sensitivity Analysis – Mid growth scenario

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Business Model Analysis

121

The low growth scenario reflects the need for advised platforms to ask customers for fees

similar to current levels in order to break even post ban

Assumption on AuA growth rate:

• The base analysis assumes 21% AuA and revenue growth rate for advised platforms and 71% AuA growth rate for the non-advised platform.

• The low growth scenario assumes 7% AuA and revenue growth rate for advised platforms and 25% AuA growth rate for the non-advised platform.

Summary on growth rate (low) sensitivity analysis:

• The low growth scenario implies customer charging levels to be similar to current levels in order for Fund Supermarkets and Wraps to break even.

• The challenge is particularly high for the Hybrid platform as it needs, in order to break even, to directly charge customers fees significantly above current

levels (at least 10 bps). However, it is noted there are issues around sustainability of the current Hybrid model.

• The bps level needed to achieve a 10% profit level post ban for the non-advised platform is considerably less than today‟s implied charges.

• Fund Supermarkets and the non-advised platform‟s ability to increase direct charges to customers through better customer propositions and

communications is the critical driver to sustain pre-ban profit margin.

• In comparison with the base analysis, the total post-ban AuA platform revenue across business models in the lower growth scenario decreases by 45%.

1 2 3

2014 business sensitivity indicators

Revenue from customers (bps) Difference from base analysis

Fund

super-

market

Wrap Hybrid Non-

advised

Fund

super-

market

Wrap Hybrid Non-

advised

Post ban bps charge to break even (direct) 31 29

[Redacted]

+8 (35%) +7 (32%)

[Redacted] Post ban bps charge to match pre ban (post

RDR) profit margin (direct) 32 31 +2 (6%) +1 (3%)

Post ban bps charge to reach 10% profit

margin (direct) 34 32 +8 (31%) +7(28%)

2010 bps customer charge (implied costs to

customers) 33 34

2010 bps customer charge (direct) 8 32

Post Bans Analysis – Sensitivity Analysis – Low growth scenario

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Business Model Analysis

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A sensitivity of growing fixed costs affects advised platforms’ business models to a greater

extent due to their reported high fixed costs ratio

Assumption on fixed costs increase rate:

• The base analysis assumes no increase in fixed costs.

• The fixed costs increase scenario assumes a 10% increase in fixed costs per year.

Summary on increasing fixed costs sensitivity analysis:

• Due to their relative high fixed costs ratio, the increase in fixed costs adds significant pressure on Fund Supermarkets business viability, requiring them to

directly charge customers at almost the same implied level as they are „charging‟ in 2010 through rebates to be profitable.

• Wrap platforms will also be affected significantly, however, the analysis indicates that business viability will not be a major concern.

• Significant pressure is placed on Hybrid platform as it needs to slightly increase its customer charging levels in order to break even. However, it is noted

there are issues around sustainability of the current Hybrid model.

• The non-advised platform will not be affected significantly relatively to the base case, due to the relatively low level of existing fixed costs.

• Wrap platforms will keep increasing their profit margin in this scenario.

1 2 3

2014 business sensitivity indicators

Revenue from customers (bps) Difference from base analysis

Fund

super-

market

Wrap Hybrid Non-

advised

Fund

super-

market

Wrap Hybrid Non-

advised

Post ban bps charge to break even (direct) 29 27

[Redacted]

+6 (11%) +5 (23%)

[Redacted] Post ban bps charge to match pre ban (post

RDR) profit margin (direct) 32 31 +2 (6%) +1 (3%)

Post ban bps charge to reach 10% profit

margin (direct) 32 31 +6 (23%) +6 (24%)

2010 bps customer charge (implied costs to

customers) 33 34

2010 bps customer charge (direct) 8 32

Post Bans Analysis – Sensitivity Analysis – Fixed costs scenario

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Business Model Analysis

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Introducing the ban one year earlier than the date assumed in the base case, increases the

challenge to break even particularly for the Fund Supermarkets and the Hybrid platform

Assumption on introducing the ban one year earlier:

• The base case analysis assumes the ban will be effective on 31 December 2013.

• The early scenario assumes the ban will be effective on 31 December 2012.

Summary on early ban sensitivity analysis:

• The business outlook for the non-advised platform remains largely the same as the base case analysis with the earlier introduction of the ban. Fund

Supermarkets and Wrap platforms will be moderately affected. The early introduction makes it more difficult for Fund Supermarkets and Hybrid platform to

break-even.

• Wrap platforms keep increasing their profit margin in this scenario, however at a lower rate than the base analysis.

1 2 3

2014 business sensitivity indicators

Revenue from customers (bps) Difference from base analysis

Fund

super-

market

Wrap Hybrid Non-

advised

Fund

super-

market

Wrap Hybrid Non-

advised

Post ban bps charge to break even (direct) 26 24

[Redacted]

+3 (13%) +2 (9%)

[Redacted] Post ban bps charge to match pre ban (post

RDR) profit margin (direct) 27 29 -3 (-10%) -1 (-3%)

Post ban bps charge to reach 10% profit

margin (direct) 29 27 +3 (11%) +2 (8%)

2010 bps customer charge (implied costs to

customers) 33 34

2010 bps customer charge (direct) 8 32

Post Bans Analysis – Sensitivity Analysis – Early introduction scenario

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Business Model Analysis

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Introducing the ban one year later than the date assumed in the base case, appears unlikely to

have significant impacts on the platforms business relative to the base analysis results

Assumption on introducing the ban one year later:

• The base case analysis assumes the ban will be effective on 31 December 2013.

• The late scenario assumes the ban will be effective on 31 December 2014.

Summary on late ban sensitivity analysis:

• The business outlook for the Fund Supermarkets, Wrap platforms and the non-advised platform remain largely the same as the base analysis with the later

introduction of the ban.

1 2 3

2014 business sensitivity indicators

Revenue from customers (bps) Difference from base analysis

Fund

super-

market

Wrap Hybrid Non-

advised

Fund

super-

market

Wrap Hybrid Non-

advised

Post ban bps charge to break even (direct) 21 20

[Redacted]

-2 (-8%) -2 (-9%)

[Redacted] Post ban bps charge to match pre ban (post

RDR) profit margin (direct) 28 30 -2 (-7%) 0

Post ban bps charge to reach 10% profit

margin (direct) 24 23 -2 (-8%) -2(-8%)

2010 bps customer charge (implied costs to

customers) 33 34

2010 bps customer charge (direct) 8 32

Post Bans Analysis – Sensitivity Analysis – Late introduction scenario

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Business Model Analysis

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Platforms are likely to require higher prices from customers if growth rates decrease and/or

additional fixed costs are incurred to support the increased AuA

Summary on revenue growth and fixed cost increase analysis:

• Revenue growth and fixed costs increase will have the greatest impact on Fund Supermarkets, Wrap platforms and the Hybrid platform. The non-advised

platform will be least affected.

• Platforms will require higher revenue (average AuA) from customers if the revenue growth rate decreases in order to become profitable.

• It will be more challenging for platforms to break even if the fixed costs under the base analysis assumption increase with the AuA increase.

• Impacts of revenue growth and increased fixed costs on the non-advised platform seem to be limited. However, further investigation may be required to

understand in more detail the potential cost increases associated with increased direct marketing and customer acquisition.

Break-even

bps

High

growth

Base Low

growth

Unchanged

fixed costs 21 23 27

Increasing

fixed costs 25 29 33

Fund supermarkets

Break-even

bps

High

growth

Base Low

growth

Unchanged

fixed costs 18 20 23

Increasing

fixed costs 24 26 32

Wraps

The hybrid sample The non-advised sample

Note: 2010 implied customer charge 33 bps, 2010 direct customer charge 8bps Note: 2010 implied customer charge 34bps, 2010 direct customer charge 32bps

1 2 3 Post Bans Analysis – Sensitivity Analysis – Growth vs. Fixed cost

[Redacted] [Redacted]

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Key Conclusions Business Model Analysis

126

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Introduction 85

Business Model Set-up 87

Current Business Analysis 91

Post RDR Analysis 97

Post Bans Analysis 108

Key Conclusions 126

Competition Analysis 128

Appendices 179

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Business Model Analysis

127

Key Conclusions

Current financial performance across platform models is varied. The impact of banning rebates

may potentially have a lesser impact on future financial performance than general market and

competitive dynamics

Platform models in the current market

• On average, the advised platforms sampled for the Business Model Analysis operated at a loss, although there were some profitable platforms. Many advised

platforms appear to operate labour intensive business models and to have relatively high levels of fixed costs. Advised platforms are currently competing intensively to

recruit advisers for their platform, and many are thought to have invested heavily on an ongoing basis in services targeted at supporting the adviser business. The

sampled non-advised platform shows a high profit margin.

• Rebates from Fund Managers represent the primary source of revenue for most platforms, except for Wrap platforms that directly charge customers for services – on

average, Wraps currently charge around 34 bps to customers.

Platform models post RDR

• Uncertainty over the ultimate impact of the RDR on the market, and on platform business models, will persist until a period after the RDR implementation deadline has

passed. A „counterfactual‟ scenario has been developed to assess the potential impact of the RDR, and one-off and on-going costs of implementing the RDR rules

have taken into account in assessing the impact on platform business model.

• Fund Supermarkets are expected to need to make significant changes to cope with RDR disclosure and advisor remuneration requirements, implying significant

costs. The impact in terms of cost requirements on other types of platforms is expected to be relatively limited. Even though significant one-off RDR implementation

costs are expected by Fund Supermarkets, market growth in levels of AuA are expected to counterbalance this and improve platform financial performance. Further

new entrants are expected to the market, which may constrain the rate of growth of AuA at an individual platform level.

Platform models post bans

• Platform models where rebates represent the primary source of revenue (all models except for Wraps) will need to make changes to their business models to collect

charges from customers. However, the implementation costs of the bans are not expected to be material (adding 1-2 bps to prices). These extra costs are expected to

be incurred in an environment where growth in AuA will be experienced. The exception to this is the non-advised platform, which has indicated that the costs to its

business of implementing the bans may be potentially significant, particularly if major systems changes (or a new system) is required. These potential implementation

costs put forward by the non-advised platform are approaching the costs of market entry.

• In the base market growth scenario modelled, the impact of the market growth in AuA implies that, for platform models, the bps charges that would be required to

break even would be lower (in some cases significantly lower) than those charged today (or the implied bps charge, where fund rebates are received currently). This

is consistent across all platform business models, even where on average these business models are not currently profitable. Alternatively, if bps charges remained

unchanged, annual AuA market growth needs to be at least 9.9% in order for all platform business models to break even in 2013.

• The sensitivity analysis reflects a range of scenarios, including market growth scenarios which additionally serve to model a range of competitive environments

through moderating AuA growth for individual platforms. The analysis indicates that for all platform models, apart from the Hybrid model, the bps charges required to

break even for the low market growth scenario, should not be above those currently attained by some platforms in the market. [Redacted].

1 2 3

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Competition Analysis

128

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Introduction 129

Key Market Economics 131

Competition Concerns 160

Conclusions 176

Appendices 179

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Introduction Competition Analysis

129

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Introduction 129

Key Market Economics 131

Competition Concerns 160

Conclusions 176

Appendices 179

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Competition Analysis

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Introduction

The Competition Analysis considers the possible positive and negative impacts of the bans on

the platform market and on consumers in particular

• This section presents the results of the Competition Analysis.

• The objective of this analysis is to provide an overview of the potential competition impacts of banning rebates in the platform market.

• In order to discuss the possible positive or negative competition impacts of the bans, an economic analysis of the platform market was required. This sought

to identify how the key economics of the market (“the key market issues”) changes as a result of the bans.

• Using this economic analysis, a number of potential competition concerns that may arise as a result of the bans were tested to check whether the bans are

conducive to their materialisation or whether, instead, they lead to benefits for competition and consumers. In this context the boundaries of the platform

market were considered.

• The impacts of the bans on market structure, market behaviours and consumer outcomes that conclude this section are based on this assessment.

• This section is structured as follows:

Focus Description

Key Market

Economics

The results of the Identification of the Key Market Economics analysis are presented under the form of a set of „key market

issues‟. These are based on the findings of the Market Background and Business Model Analysis included in this report.

Competition

concerns

Assessment of

competition

concerns

Conclusions The conclusions of the competition analysis on the impacts of the bans on market structure, market behaviours and consumer

outcomes are presented.

Each concern is then assessed based on the findings captured by the key market issues and using economic reasoning.

The potential competition concerns identified by applying relevant theories of consumer harm to the platform market are then

described in more detail.

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Key Market Economics Competition Analysis

131

Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Introduction 129

Key Market Economics 131

Competition Concerns 160

Conclusions 176

Appendices 179

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Competition Analysis

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Key Market Economics

While the Competition Analysis is principally concerned with the impact of the bans on the

platform market, it considers consequential impacts in other related markets where consumers

may engage with alternative product distribution channels • The focus of the analysis of the impact of the fund rebate and cash rebate bans is principally on the post RDR platform market. The

platform market is conventionally taken to comprise the platform services, described in the Market Background section. While the

scope of services and range of investment products may differ between types of platform there is, as described, a high degree of

product similarity and hence demand substitutability. Clearly Non-advised platforms cannot be accessed in the same way as the

other advised platforms but both types of platform can contain advised and non-advised components emphasising the scope for

demand substitutability. Other non-platform products are such that fund managers, advisers and direct consumers may move to

alternative distribution channels to acquire similar, or in some cases the same, products though often with reduced levels of

services. These are important products in closely related markets likely to be capable of exercising a degree of pricing constraint on

the platform market products given the degree of product substitutability. For this reason, they have been included in our analysis as

Adjacent Markets. The economics of the platform market needs to encompass consideration of behaviours and impacts of the bans

on other parties across the platform value chain as well as on adjacent markets.

• At the same time, the analysis of set-up costs for platforms in the Market Background section has shown that the necessary skills

and capabilities to set up a platform are open to a range of market participants (banks, life companies, fund managers and others)

such that there is a wider supply-side capability (than that that included in the current scope of the platform market comprising the

main focus of the analysis), which may also act as a constraint on pricing and other forms of market behaviour in the platform

market. This is taken account of in the competition analysis by reference to the potential for further new entry in the platform market.

• Accordingly, the Competition Analysis does not consider a single economic market but rather seeks to capture effects in a wider set

of markets. Hence, the Competition Analysis considers the following dimensions:

• Platform market structures such as barriers to entry and cost structures.

• Horizontal relationships within the platform market, such as pricing and switching between platforms.

• Vertical relationships, such as funds and advisers‟ behaviours and relative buyer/supplier powers between funds, platforms,

advisers and consumers.

• Substitution of platforms‟ services with adjacent markets.

• The existing features of competition in the platform market have been described in the Market Background Section of this report,

which has presented an analysis of:

• Platforms‟ roles and functions.

• Market structure, market participants and market shares.

• Business models and pricing.

• Entry costs, strategies and dynamics currently observed in the market.

• Balance of power between stakeholders.

• Market features and competition among stakeholders (e.g. advisers and fund managers).

• Adjacent markets.

• In the next slides, based on this analysis, competition in a post RDR and in a post bans scenarios are described, in particular by

describing the impact of RDR and the bans on the Key Market Economics.

Markets

considered

Platforms

Funds

Advisers

Customers

Adjacent

markets

Advised platform

Key

Non-advised platform

Substitution

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Key Market Economics

The key features of competition in the platform market post RDR

• The focus of the Competition Analysis is on the impact of the fund rebate and cash rebate bans on relevant markets in which the RDR has been implemented.

Accordingly, competitive conditions in these markets after RDR form an important baseline for the Competition Analysis.

• These competitive conditions will reflect a number of key changes, as discussed in the Business Model Analysis, including the following:

• Customers are expected to become more sensitive to the price of advice, and, as a result, an increasing number of consumers may employ non-advised

distribution channels. In advised markets, this increases competitive pressure on advisers, who in turn will seek to reflect this pressure on platforms and funds.

• Advisers, as a result of the separation of the price of the advice from the price of the investment product, are expected to need to demonstrate more clearly to the

customer the value of the advice for which the customer is paying fees and as such are incentivised to seek to achieve lower prices for the customer from other

parts of the value chain.

• Advisers are expected to increase their use of platforms, as these help them to achieve cost reductions and efficiencies by providing back office and administration

services, including the collection of adviser charges. In the context of the expected growth in AuA, this may lead to a continued increase in the number of platforms

in the market, and competition in the platform market is expected to increase.

• Platforms and funds are expected to respond to the increasing competitive pressure exercised by advisers and consumers. In part this may lead to more

competitive prices for customers (as already evidenced in certain reductions in fund prices). However it is possible that increased pressure from downstream in the

value chain may be countered to some extent by vertical integration upstream.

• Adjacent markets will also be subject to the general RDR rules, and hence are expected to be subject to equal pressures from advisers and customers.

• The key market issues reported in the next pages provide further analysis on competition post RDR and support an evaluation of how this may evolve as a result of the

bans.

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Key Market Economics

The identification of the Key Market Economics indicates a number of key market issues that are

central to the consideration of the counterfactual and post bans scenarios in relation to competition

issues

# Market issue Objective of the analysis Implication for the competition analysis

1 Advisers platform

selection criteria and

drivers

• To understand how bans change platform selection criteria for

advisers, once the RDR has been implemented.

• Advisers‟ selection criteria include price sensitivity, fund variety, quality of service, platform

sustainability and reputation.

• These are important to understand how market pressures from advisers on platforms and funds

change as a result of the bans.

2 Platform market costs • To understand the impact of scale economies, fixed start up costs

and the key cost categories for platforms.

• To understand the magnitude and relativity of certain costs that will

be incurred as a result of the bans.

• The nature and the variability of platform costs inform the economics of market entry and market

concentration/survival.

• The impacts of the costs of implementing the bans can be compared with adjacent markets where

no such regulation is imposed.

3 Entry in platform

market

• To understand whether the bans change market entry dynamics in

a post RDR environment.

• Market entry represents a potential competition threat to existing participants in particular when

setting price.

• Entry in this market is important as it may affect not just competition between platforms (“horizontal

competition”) but also behaviours across the value chain for both funds and platforms (“vertical

behaviours”).

• Prospective market entry, as well as the type of entry strategies, provides scope for understanding

whether the bans potentially impact on platform market structure.

4 Buyer/supplier power

across the platform

value chain

• To understand how the bans change the relative power of each

party in the value chain in negotiation with other parties in a post

RDR environment.

• This provides indications on the strengths of the relative positions of parties in price setting and

price negotiations.

5 Switching costs /

barriers

• To understand any potential changes post bans in the costs

incurred by advisers in moving clients from one platform to

another.

• High switching costs may act as a deterrent to advisers taking advantage of lower cost in the

platform market.

6 Platform market

pricing structure and

levels

• To understand the possible outcomes on pricing (structure,

transparency and level) of changes along the platform value chain

that are triggered by the bans.

• Pricing structure and transparency determine the opportunity for platforms and funds to influence

pricing levels and respond to pricing pressures from advisers and consumers.

• Different bans (on fund rebates, on cash rebates and additionally a potential ban on unit rebates)

have different implications for price structure, transparency and levels.

7 Adjacent markets • To understand the relative substitution (demand and supply) of the

platform market with adjacent markets.

• The extent of the substitution of platform services with services provided in adjacent markets allows

the assessment of whether the bans, that do not apply to adjacent markets, are likely to lead to

substitution triggered by differences in regulation between markets.

• The Key Market Economics have been identified by combining the results discussed previously in this report in the Market Background Analysis and in the Business

Model Analysis. It is presented in a way that supports the competition analysis.

• These findings are summarised under seven market issues that capture the principal economics of the wider set of markets that are analysed.

• The key market issues are summarised in the table below and discussed in more detail in the next pages.

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Key Market Economics

1: The trends observed under RDR for advisers’ platform selection criteria appear to be

reinforced by the bans...

Issue Post RDR and Post bans scenario

Pricing

sensitivity

Post RDR

• As a result of the separation of the price of the advice from the price of the investment product, advisers need to demonstrate more clearly to the customer the value of the advice the

customer is paying fees for. This emerges from the FSA consumer research.

• In addition, interviews with market participants and market experts have suggested that advisers are expected to seek to maintain or protect current levels of revenues and/or margins.

Consequently, a key element of demonstrating value and protecting adviser revenue becomes achieving lower prices for the customer from other parts of the value chain.

• As such, post RDR advisers are incentivised to be more price sensitive as they need to justify their commercial proposition to customers: this creates price (and hence cost) pressure on both

platforms and funds.

Post bans

• Interviews with market participants have noted that this price pressure may increase as a result of the bans as advisers need to justify the platforms‟ unbundled charges to customers in the

context of their advice, and will have to justify their platform recommendation based on comparing the unbundled prices of different platforms. Advisers have noted that this is currently

difficult, and while the introduction of MiFiD supports further transparency, this comparability will be enhanced by the proposed unbundling. In this way, the unbundling of charges, by

exposing advisers to increased pressure from customers, increases the incentives for advisers (seeking to retain customers) to seek improved prices and services from funds and platforms.

The unbundling of platform charges importantly allows the separation of the fund charge for which the underlying product quality may only be discerned after many years of observing the

fund performance. In contrast, the platform product may be more readily experienced and evaluated. Accordingly, while the unbundling of these two products is likely to increase pricing

pressure on both, it may do so more in respect of the platform services. In summary, as discussed further in the pricing analysis, increased price transparency helps escalate this pressure.

The assumptions on the changes in the pricing sensitivity of advisers (and of customers in non advised markets) represent a key element of the competition analysis as the changes in pricing

sensitive drive advisers‟ behaviours and the pricing pressure they will exercise relative to platforms and funds.

The assumptions made on the issue of price sensitivity in this report are based on the following evidence:

• Consumer research evidence indicating that most customers appear to believe that increased transparency over charges (resulting from the bans and RDR) would facilitate more concern

over costs and would drive increased competition (as discussed in the Market Background Analysis).

• The interviews undertaken as part of this project as well as discussions with market experts have indicated that market participants maintain the view that enhanced transparency (in other

words the unbundling of advisers‟ fee under RDR and the unbundling of platforms‟ fees as a result of the bans) will act to change consumers‟ behaviours by increasing their price sensitivity

and, hence, are expected to increase the price pressure that they will apply to advisers or platforms.

• Evidence from the experience of the Australian market where unbundled fund charges and platform charges compare favourably to current charges in the UK.

• General findings from economic theory and analysis suggest that enhanced price transparency is likely to lead to better informed consumers and to increased price competition.

It remains to be determined whether advisers and consumers will in practice act in this way, but on the basis of the indications identified above this assumption has been made in this report

• The table below and in the next pages identifies the key adviser selection criteria and discusses how these change as a result of the RDR and of the bans.

• This draws on some of the considerations presented in the Business Modelling Analysis (section 2).

• As noted in that section, it is recognised that advisers‟ selection criteria are not homogeneous for all advisers. In this section however general trends across all groups

of advisers have been considered.

1. Advisers‟ platform selection criteria

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Key Market Economics

1: ... and the bans are likely to increase advisers’ relative sensitivity to the quality/price trade-

off offered by platforms given the increased price transparency

Issue Counterfactual

Number

of funds

on

platforms

Post RDR

• Interviews with advisers and market experts have indicated that advisers are expected to continue to demand fund variety on platforms as a result of the RDR, and to continue to require

access to a varied range of funds. For example, they are expected to continue to demand lower cost and passive funds (including those not paying rebates), as recently evidenced in the

market.

• For individual advisers that consolidate in larger advisers‟ networks, advisers are likely to be less involved in the fund selection process, as this is increasingly managed centrally by the

network or by using model portfolio planning. It is expected that centralised decisions may lead to higher consistency of fund selection and to a marginally lower number of funds required by

advisers on behalf of their customers.

• This effect may be counterbalanced by the emergence of demand for smaller platforms that focus on specific advised customer groups with specific investment requests, which is likely to lead

to continued demand for fund variety.

Post bans

• Interviews with advisers and market experts have indicated that the introduction of the bans is not expected to affect the post RDR demand trend described above as they do not affect

advisers‟ behaviours directly in relation to the number of funds on platform (though other aspects of adviser behaviour is impacted).

Quality

of

service

Post RDR

• Interviews with advisers and platforms have suggested that additional functionality and quality of administrative support remains a key selection criteria when choosing platforms, particularly

for smaller adviser firms.

• This is expected to increase post RDR as a result of expected consolidation of advisers and as a result of changes in the nature of some advisers‟ role, which may for some advisers focus

more on recruiting customers than on managing/selecting investment (for which they increasingly rely on network support and advice on platforms). In addition, pressure on advisers‟ costs to

protect margins is likely to contribute to an increase in their demand for administration services for platforms.

• Interviews with advisers and industry experts have suggested that advisers are expected to continue to value platforms‟ services and recognise that platforms‟ service offering is differentiated

from adjacent markets. As such, advisers are not expected to consider adjacent markets as perfect substitutes for platforms in the provision of these services (see Market Issue #7).

Post bans

• The bans appear to reinforce the trend towards an increased importance of the service quality/price trade off as advisers need to justify the platforms‟ unbundled price to customers in the

context of their advice, and as such will need to provide a more detailed assessment of the performance offered by the platforms to accommodate consumer pressure and protect their

margins. The focus of increased price pressure from advisers and customers is likely to fall in particular on platforms relative to funds since platform services are more quickly experienced and

evaluated by consumers in contrast to fund performance. Continued entry into the platform market , as highlighted in the Market Background Analysis and the Business Modelling Analysis

(which shows that the incremental costs of the bans are unlikely to constitute a barrier to further entry) supports the provision of sufficient choice in the platform market which is consistent with

this conclusion.

1. Advisers‟ platform selection criteria

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Key Market Economics

1: Conclusions on advisers’ selection criteria

The key conclusions are:

• The bans do not appear to impact the direction of the post RDR trends in advisers‟ platform selection criteria, but do reinforce such trends for example by increasing

advisers‟ price sensitivity.

• Advisers are expected to continue to apply price pressure on both platforms and funds as a result of the bans. This is a key factor that will contribute to constrain

platform and fund charges. This pressure increases as a result of the bans as advisers need to justify not just their adviser fee but also the platforms‟ unbundled

charges to customers in the context of their advice. The unbundling of charges, by exposing advisers to increased pressure from customers, increases the incentives

for advisers (seeking to retain customers) to seek improved prices and services from funds and platforms.

• The increased platform price transparency also contributes to increase advisers‟ sensitivity to the quality/price trade off offered by platforms.

• As such, while the balance between quality and price varies depending upon the characteristics of different advisers and customers groups and their investment

needs, the post RDR trends towards an increase in the relative sensitivity of advisers to platform quality and prices are expected to be reinforced by the bans.

• These conclusions are based on evidence indicated by consumer research, interviews with market participants, experience in the Australian market and on economic

analysis.

1. Advisers‟ platform selection criteria

Issue Counterfactual

Platform

sustaina-

bility

Post RDR

• As a result of the separation of the price of the advice from the price of the investment product, advisers need to demonstrate more clearly to the customer the value of the advice the

customer is paying fees for.

• It is expected that advisers would need to minimise the risk of exposing their customers to additional costs when platforms leave the market or lose advantageous market positioning, thus

requiring investors to switch to another platform. This may lead not just to some costs for customers and advisers but also to „an embarrassment and hassle factor‟ for advisers as they have

to justify platform switches.

• Consequently, platform sustainability (both in terms of service quality and in terms of funds‟ pricing over time) is likely to become an increasingly key factor for advisers.

Post bans

• In the presence of multiple share classes for the same fund on different platforms (which could be triggered by the bans as we discuss in more detail in Market Issue #6), the importance of

this factor increases.

• Platform sustainability therefore adds a degree of constraint to platform switching, which by itself reduces the „buyer‟ power of advisers. However advisers, as described previously, may

mitigate this impact by developing relationships with more than one platform. Moreover, switching costs are not considered to be excessive. Thus, while switching costs may constrain market

competitiveness, they are not expected to prevent advisers and consumers exercising effective pricing pressure on platforms.

Number

of

platforms

used by

advisers

Post RDR

• The Market Background Analysis showed research suggesting that advisers use an average of 2.2 platforms, with 65% of IFAs using between 2 and 4 platforms. However, for new business,

53% of advisers use a single platform.

• As indicated in the Business Model Analysis (Section 2), post RDR, advisers are expected to continue to use a limited number of platforms as advisers need to be seen to be offering choice

to customers. Furthermore, platforms will facilitate adviser charging so advisers are unlikely to want to be concentrated in a single platform.

Post bans

• Interviews with market experts and advisers have indicated that the bans do not impact these expectations.

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Key Market Economics

2: The entry costs of establishing a platform are not impacted by the bans...

Platforms’

cost

Relevance to Competition Analysis Finding Implication

Initial

platform

set up

costs

• This measures the cost of entry in the platform

market.

• A high cost would suggest barriers to entry are

high and opportunities for anticompetitive price

increase are more sustainable.

• A low cost would suggest that entry in the

market remains a constant threat to current

market participants. This is likely to add further

pressure to their pricing levels.

Initial set up costs have been described in

the Market Background Analysis. This

indicated a range varying from £5m to

£30m.

As noted in that section of the report,

interviews with operators indicate that entry

costs are highly dependant on the

commercial proposition being developed.

Discussions with operators and market

experts indicated that set up costs are

unlikely to change as a result of the bans.

• Set up costs vary depending on the commercial proposition and

on whether the entrant has similar existing technical (e.g. fund

managers) or marketing facilities (e.g. advisers).

• For fund managers and manufacturers these entry costs are

unlikely to appear large in relation to their typical scale of

revenues.

• For advisers wishing to set up their own platforms, these costs

may be more onerous but advisers would not need to invest in

marketing costs to the distribution network.

• In conclusion, the sunk costs of entering the market are unlikely to

be considered a substantial barrier, as demonstrated by the

continued trends to market entry currently experienced.

Cost of

adding a

fund on a

platform

• A high cost of adding a fund onto a platform

would lead platforms to consider preventing

access to additional funds if they are subject to

financial pressure.

• At the time of the bans, the costs for

implementing the bans may increase the

sensitivity to these costs.

Interviews with platform operators and data

collections have indicated a range varying

from £500 to £3000 for cost incurred relating

to adding a fund onto a platform.

Discussions with operators and market

experts indicated that these costs are

unlikely to change as a result of the bans.

• This cost appears limited.

• While the fund rebate ban and ban to any payments from funds to

platforms (including administration charges to add a fund) may

change the marginal benefit of adding a fund to the platform, this

one-off relatively limited figure suggests that the cost savings that

would be achieved by not adding a fund is likely to remain lower

than the marginal benefits of including a fund with reasonable

attractiveness to investors.

• The table below identifies the key cost categories for platforms and funds that are relevant to the Competition Analysis and also sets out how this information is

employed and the implication of each finding for the Competition Analysis.

• The data presented in this table is primarily based on the Business Model Analysis.

• The table below reports the key findings of the overall costs for platforms of implementing the bans and their implications for the Competition Analysis. These have

been discussed in the Business Model Analysis section of this report.

2. Platform costs

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Key Market Economics

2: ... but the implementation of unit rebates and/or managing multiple share classes will lead to

some extra costs for platforms...

Platforms’ cost Relevance to Competition Analysis Finding Implication

Implementation

/managing cost of

having additional

share classes for

each fund

• As discussed in Issue #6, if unit rebates

are not allowed there is a risk that the

bans could lead to a multiplication of share

classes.

• It is therefore important to understand the

cost and implications for platforms and

funds of managing additional share

classes.

Interviews with platform operators and data

requests indicate that platforms would incur

a £400 management cost per year per

share class.

This unit cost of managing a single share

class will not change as a result of the bans,

but the total costs will substantially increase

if bans lead to multiple share classes.

• There are no scale economies in this cost category, such that managing two

share classes for a fund is equivalent to managing two funds.

• This has significant implications given that platforms manage 1,000 to 4,000

funds. If more than one share class is attached to a fund, these costs would

increase very significantly.

Implementation of

unit rebates

• This measures the costs of implementing

unit rebates. It considers whether it is

more affordable for platforms to use unit

rebates or to manage multiple share

classes for the same fund.

As noted in the Business Model Analysis

(Section 3), interviews with platform

operators, industry experts and data

requests from operators indicate that

platform would incur between £500k and

£1m to implement and £100-200k per year

ongoing cost (mainly people costs).

• While significant in the short term, this cost appears to be in the long term lower

than having to manage multiple share classes for each fund on the same

platform, particularly for platforms with larger fund ranges.

• As an example, if it assumed that a platform has 2,500 funds, the cost of a

single share class (£400) is currently around £1m. If share classes double, then

another £1m per annum in costs is incurred on a platform. This is equivalent to

the „worst case scenario‟ one-off cost of introducing unit rebates. Funds and

platforms will take into account the extra costs of adding share classes together

with competitive advantage of offering a clear headline price. For this reason it is

to be expected that, responding to some pressure from platforms (and advisers),

funds will wish to make use of unit rebates alongside their clean share class.”

Overall business

costs of

implementing bans

(based on Business

Model Analysis)

• These costs indicate the extent to which

platforms‟ profitability will be impacted as a

result of the bans, with potential

implications on sustainability, market exit,

and cost reduction requirements.

See Business Model Analysis, Section 3.

In summary, the costs to platforms of

implementing the bans may be in the range

of £0.2m to £20m depending on their

business model.

The Business Model Analysis has indicated that:

• The direct cost of implementing the bans appears higher for D2C, Fund

Supermarket and Hybrid platforms. These costs also appear less onerous for

them than the business model change costs.

• In the D2C market, the fund rebate leads to creation of new costs for platforms

(such as the development of customer facing operations related to payment

management). These may be significant depending on the respective platform‟s

existing capabilities. There are commented on further in the Business Modelling

Analysis.

• These costs need to be considered when assessing possible distortions

compared to adjacent markets where such costs are not imposed.

2. Platform costs

Continued from previous page

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Key Market Economics

2: ...and multiple share classes would also increase fund managers’ costs.

The key conclusion on platforms‟ costs are:

• The bans do not change the set up costs that are sunk when entering the platform market. These are dependant on the proposition being developed and are unlikely

to be considered a substantial barrier, as demonstrated by the continued trends to market entry currently experienced.

• The costs for platforms of adding and managing funds also appear relatively limited and are not impacted by the bans.

• The bans may lead to the creation of additional cost categories for platforms and funds:

• Costs to manage multiple share classes in the event that share classes increase: these costs do not appear insignificant for funds, while for platforms managing

more than one share class for a fund is equivalent to a cost duplication and may lead to substantial cost increases.

• Implementation of unit rebates: while platforms will incur some costs for implementing unit rebates, in the long run these seem lower than the costs of managing

multiple share classes.

• The Business Model Analysis has concluded that the direct cost of implementing the bans appear more onerous for Fund Supermarkets, Hybrid and for D2C

platforms. However in total these costs are likely to represent less than a few bps in charges for most consumers.

• The direct cost of implementing the bans also appears less onerous than the business model challenge for Fund Supermarkets, Hybrid and for non-advised platforms.

In the D2C market, the fund rebate leads to additional costs for platforms (such as the developing of customer facing operations related to payment management) and

may be significant .

2. Platform costs

Fund Managers’

costs

Relevance to Competition Analysis Finding Implication

Implementation

/managing cost of

having more than one

share class for

different platforms/

the same platform

• As discussed in Issue #6, if unit rebates are not

allowed there is a risk that the bans could lead to a

multiplication of share classes.

• It is therefore important to understand the cost and

implications for platforms and funds of managing

additional share classes.

An indicative cost range provided by one

fund manager in interviews suggests that

it would cost funds between £3.5k -10k for

the creation of a share class plus £10-15k

annual running cost for each class.

• These costs do not appear insignificant for fund managers and a

multiplication of share classes across many platforms would lead to cost

increases.

Implementation of

unit rebates

• This measures the costs of implementing unit

rebates. It considers whether it is more affordable

for funds to use unit rebates or to manage multiple

share classes for the same fund.

Interviews with fund managers and

industry experts indicate that fund

managers would incur limited costs as the

rebate allocation work is mainly carried

out by the platforms. They would however

incur some limited additional costs for

transaction execution.

• The costs for fund managers to implement multiple share classes appear

higher than the management of unit rebates.

Continued from previous page

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Key Market Economics

3: Entry into the platform market by new participants is expected to continue to occur under

the RDR...

Scenario Considerations on entry

Current

entry

levels

• The Market Background Analysis has indicated that rapid growth of AuA on platforms is expected to continue in the short to medium term and that a number of prospective new entries to the

platform market have been announced, with more anticipated. New entry is therefore currently being experienced in the market for numerous reasons including:

• Expectation of rapid growth of AuA on platforms.

• Strategic entry by upstream or downstream entities that want to extend their footprint in the value chain and to be perceived as market players in the platform market, and new entry in the

D2C market, which may increase post RDR. The latter is expected as currently only a limited number of D2C platforms exist, and existing advised platforms have indicated a desire to

extend their services in the non-advised market to supply an expected demand increase in that segment, which may be prompted by customers not wishing to pay explicit adviser fees post

RDR.

• Barriers to entry do not appear substantial, as demonstrated by increasing market entry: in particular, the analysis of platform costs carried out as part of the Business Model Analysis and

interviews with market participants indicates that, in addition to sunk costs in IT infrastructure and development, the main entry costs comprise marketing to advisers and their networks.

• While experience in other countries (such as Australia and USA) suggests that the market could develop so that the bulk of investment in the market tends to concentrate around a limited

number of large scale platforms, market opportunities for smaller adviser-focussed platforms remain as well as for D2C platforms.

Post RDR

Scenario

• The RDR is not expected to impact the barriers to entry described above (see Issue #2) and, by leading to further market growth, is expected to further incentivise entry. In particular, the

RDR increasingly incentivises advisers to use platforms as part of their business to achieve business efficiency.

• New entrants are particularly expected in the D2C market as a result of the RDR as some of the most price sensitive customers may decide to invest directly on platforms instead of paying

an unbundled adviser fee.

Post bans

scenario

• By changing the nature of the platforms‟ pricing structure through requiring them to apply unbundled charges to customers and by potentially increasing the platforms‟ cost, the bans risk

changing financial outcomes for platforms. This has been investigated in the Business Model Analysis and the key implications for market entry are discussed below.

• In the advised market, the Business Model Analysis indicates that revenue and cost risks generated by the bans are expected to be more than balanced by the existing trends in market

growth even after allowing for some additional new entry. In this way the Business Modelling Analysis, taking into account the costs of implementing the bans, has indicated that the price

implications are no more than few basis points which is consistent with the bans not constituting a further barrier to entry for new platforms.

• As such the extent of the expected market growth supports the view that entry (especially for strategic purposes) will continue to occur even if the bans are imposed, thus potentially resulting

in a limited impact of the bans on market entry in the short/medium term.

• In the non-advised market, the fund rebate ban may lead to significant changes in business models as D2C platforms need to develop enhanced customer interfaces in order to ensure that

revenue collection from customers replaces current revenue collection from funds. However, the RDR is expected to lead to higher growth for D2C platforms, potentially balancing this effect.

• While the bans may require changes in business models and create pressure on profitability, this is unlikely to constrain further entry or the development of unintermediated propositions (due

to the impact of the RDR noted above). In addition, the non-advised market currently comprises relatively fewer players and exhibits higher profitability.

• As such, the bans are unlikely to lead to a reduction in entry in the D2C market.

• In conclusion, the bans may create some additional financial pressure on platforms but market growth is likely to support continued entry. However the bans may increase the existing trends

to new entry based on vertical integration or niche customer focussed propositions and vertical integration of existing platforms with fund providers in order to respond to such increased

pressure. This is discussed in more detail on the next page.

• The table below presents considerations on how market entry may vary as a result of the RDR and discusses whether the bans are likely to affect entry in the

market.

• This analysis is based on the findings presented in the Market Background section on entry strategies and trends.

3. Entry in platform market

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Key Market Economics

3: ... and this trend is unlikely to be impacted by the bans

The key conclusions on market entry are:

• The platform cost analysis indicates that barriers to entry in the platform market do not appear substantial, as evidenced by the continuing number of platforms entering the market.

• The increase in demand for platforms triggered by market trends (including legacy assets being transferred to platforms) and by the RDR are expected to lead to further market

growth and market entry, and in particular to advised platforms providing D2C propositions.

• The trends to upstream vertical integration are not necessarily intended to support higher prices for the integrated entity or aimed at excluding funds, but would rather be aimed at

retaining existing levels of remuneration upstream against the threat of increasing price pressure from downstream in the retail distribution value chain resulting from the RDR and

bans.

• Market trends and the RDR are expected to generate further significant growth in the platform market and on balance the bans are not expected to increase barriers to entry and

constrain further entry (including from funds) in the short/medium term for both advised and non-advised markets.

Implications of different entry strategies for Competition Analysis

• The “vertical integration” entry and the “customer-focussed entry” strategies are analysed in more detail below as these may have implications on market structure and on the key

market economics.

Vertical integration

• As explained in the Market Background Analysis, retail investment manufacturers, including both fund managers and life companies, enter the platform market to extend their

existing footprint and gain further revenues across the retail distribution value chain. This strategy has the potential to both drive / enhance new business revenues and to „protect‟

against legacy / back book business being „churned‟ away from the provider to alternative providers and platforms.

• From a competition point of view, the trend to vertical integration can be explained in the context of the increase in market pressure from advisers as a result of the RDR (discussed

in Issue #1 and #4).

• The extra pressure on quality/price that advisers are expected to exercise on platforms and funds as a result of the RDR and the bans may prompt further funds to enter the platform

market or platforms to seek upstream integration to respond to higher price pressure by seeking to reinforce the vertically integrated entity‟s control on prices for distribution. This

would be aimed at counteracting advisers „control‟ over customers and intended to seek to exploit advisers‟ dependency on the services provided by platforms. The significant extent

of existing vertical integration is highlighted in the Market Background Analysis.

• As such, upstream vertical integration is not necessarily intended to support higher prices for the integrated entity or aimed at excluding funds, but would rather be aimed at retaining

existing levels of remuneration upstream against the threat of increasing price pressure from downstream in the retail distribution value chain (the advisers). While the platform

market is developing and overall competitive conditions (and regulations) remain uncertain, the vertical integration strategy may in some respects be regarded as defensive.

Customer-focussed entry

• The Market Background Analysis also reported the emergence of customer focussed platform propositions such as those of restricted advisers, those focused on mass affluent

clients, and downstream integration platforms, i.e. advisory firms focused on their own client base as has happened in the Australian market where there are about 60 small adviser

platforms.

• These platforms appear to target specific market niches in which the platforms have some distributional advantages.

• This suggests that these platforms, whilst not competing directly with the larger platforms, will still be able to exercise market pressure in particular on customised quality

propositions, and are likely to continue to provide fund variety to advised customers with demands for specific funds.

• In addition, the potential scale of entry costs and examples of downstream integration indicate that advisers acting together as opposed to individually appear to have the option of

creating their own proprietary platforms should they be unsatisfied with existing platforms‟ propositions.

3. Entry in platform market

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4. The bans appear to reinforce the RDR trends of an increase in the buyer power that advisers

exercise on platforms and funds on behalf of their customers (i)

4. Buyer/supplier power

• This page summarises the impacts of the bans on the relative negotiation powers for participants along the platform market value chain.

• The analysis is based on the considerations reported in the Business Modelling Analysis (Section 2).

Advisers

• As a result of the separation of the price of the advice from the price of the investment product, advisers need to demonstrate more clearly to the customer the value of

the advice the customer is paying fees for. A key element of demonstrating value and protecting revenue becomes achieving lower prices for the customer from other

parts of the value chain. As discussed in Issue #1, this effect is reinforced by the bans as the unbundling of charges, by exposing advisers to increased pressure from

customers, increases the incentives for advisers (seeking to retain customers) to seek improved prices and services from funds and platforms.

• In the context of their unbundled fees, if cash rebates are banned, the potential for advisers‟ bias may be reduced. While it is recognised that in practice units may be

converted to cash to fund platform or adviser charges, this additional step preserves a degree of separation and therefore transparency between these charges. In this

way unit rebates require instead a more careful explanation of unit value, and so may lead to greater customer engagement and awareness. However, this is at the

expense of possible transaction costs for encashing units to fund the cash account and the greater cost and complexity of administering unit rebates relative to cash.

Nevertheless, the importance of achieving greater customer engagement both post-RDR and post-ban is such that these costs may be appropriate.

• Interviews with market participants and experts have suggested that the increased price transparency that is likely to be created in the market as a result of the bans (see

Issue #6) appears to reinforce the advisers‟ buyer power towards funds and platforms.

• As such, the relative power of advisers appears to increase both as a result of the RDR and as a result of the bans.

Platforms

• Platform operators have reported concerns that the bans are likely to reduce platforms‟ market power towards funds as any payments from funds to platforms are

prohibited.

• However, while the bans prohibit payments from funds, platforms are expected to continue to exercise pressure on funds because of their relationship with customers and

advisers.

• Platforms appear to be in a position to transmit the advisers and customers‟ pressure for advantageous charge levels and unit rebates vertically to funds. In the context of

the platforms‟ unbundled charges, platform pressure to agree advantageous terms from funds for their customers may increase their pressure on funds.

• While platforms‟ buyer power will no longer be manifested through fund rebates, it is expected to materialise through negotiations on charge levels and unit rebates, thus

benefitting customers and allowing platforms to present a new reasoned proposition to advisers and customers.

• Market participants have noted that a key element of maintaining platform pressure on funds appears to be provided by allowing unit rebates in the market. If these are

allowed, platforms can fully transmit the customer‟s pressure on funds to achieve discounts for their investment below the prevailing share class. If this transmission

mechanism is removed and no unit rebates are allowed, platforms' buyer power towards funds may be reduced.

• In conclusion, while it is recognised that platform operators have voiced concerns that the fund rebate may reduce their buyer power towards fund managers, the

increased price transparency resulting from the bans is likely to ensure that pressure from customers and advisers downstream is transmitted through platforms to funds.

This is likely to be reinforced if unit rebates are allowed.

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4. The bans appear to reinforce the RDR trends of an increase in the buyer power that advisers

exercise on platforms and funds on behalf of their customers (ii)

4. Buyer/supplier power

Funds

• While funds may appear to gain power towards platforms as a result of the ban to fund rebates, the analysis above suggests that funds are likely to suffer from

increased pressure from advisers and customers transmitted through platforms.

• As noted in Issue #3, the extra pressure on quality/price that advisers put on platforms and funds as a result of the RDR may explain why the bans may prompt funds

to enter the platform market of platforms to seek upstream integration, responding to the increased price pressure exercised by advisers.

Consumers

• As described in Issue #6, the bans, by leading to fully unbundled charges for platforms (in addition to a fully unbundled adviser fee following the RDR), are likely to lead

to increased transparency for consumers.

• This is expected to lead to higher responsiveness of some segments of consumers to the price/quality offerings of advisers and platforms.

• Increased awareness and pricing pressure from consumers would be exercised vertically in the value chain either through advisers or directly in non advised markets.

Continued from previous page

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5. Post RDR, switching is likely to be simplified as a result of re-registration rule changes, and

switching costs would appear to increase as a result of the bans only if there is a significant

multiplication of share classes in the market

5. Switching costs/barriers

• While switching costs in the platform market have been discussed in the Market Background Analysis, this page sets out the issue of switching costs in the

context of the Competition Analysis.

• Switching costs are important in determining the extent to which the increased pricing pressure on platforms and funds from advisers, as discussed in Issue #1

and #4, is effective in constraining platforms and fund prices in a post bans scenario.

Switching costs post RDR

• As discussed in the Market Background Analysis, there are a number of switching costs that are incurred when advisers switch an investment into the same fund

onto a different platform.

• Re-registration will be facilitated post RDR, as noted in the Market Background Analysis. Rules are being put in place to avoid the customer having to encash

investments and re-purchase them elsewhere if they wish to switch to a different platform.

• Post RDR, the administration and time cost to the adviser of moving clients to alternative platforms is likely to remain a relevant switching cost, but this may be

justified if platform competition leads to price changes the adviser would like to take advantage of. However, if the choice to move investment is due to previous

potentially inefficient decisions made by the adviser, post RDR advisers will be required to explain the switch to customers in the context of their fee for advice,

potentially generating “embarrassment” for them.

• Advisers are therefore subject to increased pressure to avoid potential reputational damage as a result of multiple switches.

• As such, selecting the correct platform has implications for the advisers‟ reputation and this appears to lead to further increases in price and quality pressures

from advisers to platforms. As noted in Issue #1, the importance of platform sustainability increases in this context.

Switching costs post bans

• The bans do not appear to have an impact on these considerations, and as such switching costs/barriers are unlikely to increase compared to a post RDR

scenario.

• However, if a multiplication of share classes occurs, switching costs may increase due to two effects:

• First, multiple share classes would lead to increases in pricing complexity, thus making it more difficult to compare prices between platforms and exercise

choice.

• Second, the process of switching may become more complex because it may be necessary to encash an investment in order to transport it between

platforms.

• These factors would appear to reduce advisers‟ ability to exert pricing pressure may decline. This issue is discussed in more detail in Issue #6.

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6: The pricing analysis considers the potential impacts of the bans on charging structure,

transparency and possible outcomes for price levels

• The analysis of the potential impacts of the bans on market pricing is presented in the next pages and is structured as follows:

Post RDR effects on pricing

• 6.1 summarises the expected effects and implications of the RDR on pricing in the market by describing expected impacts on the charge structure (included bundled

prices and share classes) and on the charging levels for funds and platforms.

Impacts of the bans in the advised market

The potential effects and implications of the bans on pricing in the advised platform market is described by analysing impacts on charging structures (including bundled

prices and share classes), price transparency and potential implications for price levels:

• 6.2 discusses the potential effect of the bans on price structure and the implication for the Competition Analysis.

• 6.3 discusses the effect of the bans considered by the FSA on price transparency and the implication for the Competition Analysis.

• Having reviewed the impact of the bans on charge structure and transparency, 6.4 sets out the potential effect of the bans considered by the FSA on funds and

platforms‟ price levels.

For each element described above, the analysis is undertaken by considering the potential impact on charging structures, transparency and levels of:

• Banning fund and cash rebates (allowing unit rebates), i.e. the current proposal.

• Also banning unit rebates.

• Retaining cash rebates.

Impacts of the bans in the non-advised market

• 6.4 discusses the potential effects and implications of the bans on pricing in the non-advised market and describes expected impacts on the charging structure,

transparency and levels for D2C platforms.

6. Prices

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6.1: The RDR will result in the unbundling of advisers’ fees from existing share classes, and is

expected to reinforce existing trends in prices

Impacts of the RDR on charge structure

• As a result of the separation of the price of the advice from the price of the investment product, advisers‟ fees become more transparent to customers.

• This separation leads to the creation in the market of an additional share class that reflects the unbundling of the advisers‟ fees.

• Other than impacts on advisers‟ charges, the RDR does not impose any other restrictions to funds and platforms‟ prices. As such, limited changes are expected in the

structure of funds and platforms‟ charges, and in particular:

• No changes in pricing structure are expected for Wrap platforms because of their existing business model.

• Interviews with Supermarket and Hybrid platform operators as well as a review of their commercial propositions indicates that, while they may be starting to offer

options that depart from a bundled payment structure, no other significant changes are expected.

• Interviews with market participants have also indicated that some fund managers are moving to offering platforms „clean‟ share classes but the majority are

expected to continue to offer rebates. In the event that a reasonable number of fund managers move towards offering a „clean‟ share class, then this may increase

pressure on others to follow suit.

• On balance, most platforms and funds are not expected to make significant structural charging changes as a result of the RDR.

Impacts of the RDR on charge levels

• With regards to funds‟ charges, post RDR it is expected that:

• As advisers need to demonstrate the best value to customers for the advice they are paying for, they will exercise further downward pressure on fund prices.

• The advisers‟ propensity to switch investment away from high priced funds to low price funds, which has been experienced in certain segments as indicated by the

addition of passive funds and ETFs to platforms despite them not paying rebates, may further increase pressure on high price funds.

• As such, the potentially emerging trends in reductions to funds‟ prices (for example in certain active funds such as JP Morgan) are expected to continue after the

RDR.

• With regards to platforms‟ charges, post RDR it is expected that:

• As advisers need to demonstrate the best value to customers for the advice they are paying for, pressure on platforms‟ price and quality offering from advisers is

expected to increase.

• Indeed, the trends to vertically integrated entry (funds starting to offer platform services) that is being experienced can be explained in terms of a stronger entity

upstream trying to respond to expected increased pressure from advisers downstream.

• As such, existing trends in platform charges are expected to persist as at present and platforms may continue to retain some of the funds‟ price reductions.

• Advisers‟ upfront fee: while pressure from customers will increase, advisers have noted in interviews that post RDR their charges are expected to remain within the

existing trends as they expect to protect their existing margins.

• In the non-advised market, the impacts of the RDR on charges are more limited and as such existing trends are expected to continue. Major changes to charging

structures and levels are not expected.

Conclusions

• Overall the RDR, by making advisers more focussed on value, reinforces existing price trends and is not expected to create major changes on charges levels.

• This page discusses the potential effects and implications of the RDR on pricing in the market by describing expected impacts on the charging structure (included

bundled prices and share classes) and on the charging levels for funds and platforms.

6.1 Prices – Post RDR

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6.2: The fund rebate bans reinforces the trend (under the RDR) to the creation of a small

number of different clean share classes...

Ban type Effect on price structure Implications

Ban to

fund

rebates

and cash

rebates

Fund rebate ban

• As a result of this ban, all payments from funds to platforms are removed.

• Consequently, as a result of the bans, platforms are expected to start charging

customers unbundled charges or, where they already do, increase charges to recoup

the lost revenue from the banning of fund rebates (hence without there necessarily

being an increased cost to customers).

• In response to the bans, an increase in the number of share classes may be possible.

An additional share class is likely to be required to reflect the fully unbundled platform

charge. If timing allows, it is possible that funds and platforms would move to create

only one additional “unbundled ” share class in response to both the RDR and the bans.

It is noted that managing more share classes is costly for platforms but also for funds,

and as such there may be market pressure to avoid an increase in the number of share

classes beyond the „unbundled platform charge‟ share class. Interviews with markets

participants have suggested that funds and platforms will seek to minimise the number

of share classes that may arise as a result of the bans.

• Operators have noted the possibility that the bans may lead to funds creating a small

number of different clean share classes for each fund that they will apply to different

platforms (one class for each category of platform). These would reflect to some extent

the current rebates provided to platforms.

• If this occurs, platforms that can today negotiate significant rebates would be expected

to receive a more advantageous share class than platforms with lower negotiating

power.

Cash rebate ban

• Unit rebates are implemented instead of cash rebates.

Fund rebate ban

• By prohibiting fund rebates and any payments from funds, the ban changes the scope of the

instruments used by funds and platforms to negotiate payments based on platforms‟

success/volumes.

• By offering different clean share classes to different platforms, funds would continue to

compensate funds depending upon their success (largely AuA).

• An implication of the potential share class segmentation may be that funds would offer a

“headline price” (namely the share class) to platforms, which may differ between platforms.

• This headline price contributes to increase transparency in the market as well as platforms‟

ability to negotiate a limited number of share classes that will be used as headline prices in

their offering.

• Under this scenario, platforms would still manage a small number of share classes for each

fund, which would contain increases to their costs.

Cash rebate ban

• Permitting unit rebates allows funds to readjust remuneration for platforms‟ performance

beyond the share class segmentation (if this trend occurs).

• The next pages describe the potential effects and implications of the bans on pricing in the advised platform market by describing potential impacts on platforms and

funds‟ charges on:

• Charging structures (including bundled prices and share classes).

• Price transparency.

• Price levels.

• The table below discusses the effect of the bans on price structure by considering the potential impacts of banning fund and cash rebates (allowing unit rebates), of

also banning unit rebates and of retaining cash rebates.

6.2 Prices – Post bans / advised markets : impact on charging structures Key Market Economics

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6.2: ... while banning unit rebates risks a multiplication of share classes

Ban type Effect on price structure Implications

If unit

rebates

are also

banned

Two scenarios may occur if unit rebates are also banned:

1. To allow price differentiation with respect to levels of investment,

a multiplication of share classes for the same fund both across

platforms and on the same platform may occur, which is based

on volumes of investment collected by platforms across advisers

or customers. Share multiplication effectively replaces the

flexibility given by rebates to adjust price discounting to levels of

investment.

2. If funds and platforms cannot or are not willing to implement

multiple share classes and multiplication of share classes does

not occur, then fund charges are likely to be set at a uniform

level.

• As noted in Issue #2, for the platforms managing more than one share class for a fund is equivalent to a cost

duplication and this may lead to substantial cost increases. Multiple share classes for the same fund therefore

appear to lead to significant cost increases.

• As noted in Issue #2, in the long term the cost of introducing unit rebates appears to be lower than having to

manage multiple share classes for each fund on the same platform.

• In the presence of substantial cost increases due to multiple share classes, platforms may be forced to react by

controlling costs/reducing quality or by increasing prices.

• As a result, the value of the platforms‟ market proposition risks being reduced and it is expected that some

platforms may not support the multiplication of share classes.

• If instead uniform fund charges are implemented, these do not permit price differentiation and as such may not

reflect additional discounts for high levels of investment.

• This is likely to penalise high net worth individuals, who may receive lower discounts for their investment and as a

consequence may consider switching to other investment vehicles. However, it is recognised that these

individuals are currently principally using wrap platforms, which are not significantly impacted by the bans.

• In conclusion, under both scenarios, if unit rebates are not allowed, there may be negative implications for

platforms.

If cash

rebates

are

allowed

• The effects on the charge structure of retaining cash rebates whilst

banning fund rebates are similar to those of banning fund rebates

but allowing unit rebates (illustrated in the previous page) as cash ,

in the same way as unit rebates, allow price differentiation by level

of investment.

• Cash rebates would continue to be implemented and shared

between customers and advisers as in the current situation.

• The implications on charge structure are similar to the “Fund rebate ban” implications illustrated in the previous

page.

• Greater transparency in share classes is counterbalanced by lower transparency for customers, who may exhibit

low levels of engagement with their cash accounts, as well as bias issues - advisers may be biased in selecting

those propositions with higher levels of rebates (see next pages for further comment on transparency).

The key conclusions on impacts of the bans on price structure are:

• The fund rebate ban appears consistent with the creation under the RDR of a small number (or possibly only one additional) clean share classes, that act as “headline

prices”. Funds and platforms will take into account the extra costs of adding share classes together with the competitive advantage of offering a clear headline price.

For this reason it is to be expected that, responding to price pressure, funds will wish to make use of unit rebates alongside their clean share class.

• Banning unit rebates could lead to a multiplication of share classes, which would increase platforms and fund managers‟ costs. Consequently funds are expected to

start implementing unit rebates as these mitigate the risk of a proliferation of share classes and provide a mechanism for funds to discount to consumers below a

uniform share class. Alternatively, if multiple share classes are not implemented, fund charges are likely to be set at a uniform level, which would reduce price

differentiation and as a result would be likely to penalise high net worth individuals in particular.

Continued from previous page

6.2 Prices – Post bans / advised markets : impact on charging structures

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6.3: By requiring unbundled charging and banning fund rebates, the bans are likely to increase

price transparency...

Ban type Effect on price transparency Implications

Ban to

fund

rebates

and cash

rebates

Funds‟ prices

• As discussed in the previous pages, the fund rebate ban appears consistent with the

creation under the RDR of a small number (or possibly only one additional) clean share

classes, that act as “headline prices”.

• These prices are expected to be fully unbundled and transparent to advisers and

customers.

• The unbundled price to customers and the extent of the unit rebate fully reflect the funds‟

remuneration.

• As such, transparency of fund charges is likely to increase as a result of the bans.

Platforms‟ prices

• As discussed in the previous pages, as a result of the fund rebate ban, all payments from

funds to platforms are removed.

• Platforms currently remunerated through fund rebates are therefore expected to start

charging customers unbundled charges or, where they already do, increase charges to

the extent necessary to recoup the lost revenue from the banning of fund rebates.

• This increased transparency is expected to allow advisers and customers to exercise

increased pressure on funds and platforms‟ prices.

• This is likely to lead to more effective market pressure on charges.

• As discussed later in the price level analysis, the pressure exercised by advisers/customers,

coupled with the changes generated by the RDR, is expected to continue to prove effective

in constraining funds and platforms‟ price levels.

• Platforms‟ pressure on funds is still exercised, albeit not through rebates but through

negotiation of more transparent “headline prices” and unit rebates.

• As a result of the bans, platform charges are no longer “hidden” to end customers and the

platforms‟ price is more transparent; platforms are expected to compete harder on service

quality to justify their proposition in the context of an unbundled charge.

If unit

rebates

are also

banned

As discussed in the analysis of charge structure, two scenarios arise if unit rebates are also

banned:

1. To allow price differentiation with respect to level of investment, a multiplication of

share classes for the same fund on the same platform may occur, which is based on

volumes of investment collected by platforms across advisers or customers. Share

multiplication effectively replaces the flexibility given by rebates to adjust price

discounting to levels of investment.

2. If funds and platforms cannot or are not willing to implement multiple share classes and

multiplication of share classes does not occur, then fund charges are likely to be set at

a uniform level.

• In this scenario it appears more difficult for advisers to identify the best value platforms and

funds, as multiple share classes for the same funds on the same platform may vary

depending on overall volumes collected by platforms, or potentially even by the adviser, and

may also vary by platform.

• This appears to increase complexity and reduce transparency and some market operators

have suggested that they are not entirely clear about how such a mechanism could work in

practice.

• The higher transparency given by a single share class with no rebates is in this case

counterbalanced by lower pricing flexibility.

• This may prompt high net worth individuals to search for better returns and the likelihood of

them shifting to other investment vehicles may increase.

• The table below discusses the potential effect on price transparency and the implication for the Competition Analysis of the bans by considering the potential impacts

of banning fund and cash rebates (allowing unit rebates), of also banning unit rebates, and of retaining cash rebates.

• Price transparency is relevant as it allows advisers and non-advised customers to compare funds and platforms‟ charges clearly. Given the expected market structure,

this would increase price competition in the market. The extent to which operators can apply countervailing strategies for price obfuscation as a response to the bans

is also discussed.

6.3 Prices – Post bans / advised markets : impact on price transparency

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6.3: ...while banning unit rebates would lead to higher complexity

Ban type Effect on price transparency Implications

If cash rebates are

allowed

• Cash rebates would continue to be

implemented and shared between

customers and advisers as in the

current situation.

• Transparency for customers may be reduced in this scenario as customers would be likely to continue to show low levels of

engagement in cash accounts while advisers continue to be able to manage cash accounts (and facilitate payment of platform and

administration charges) similarly to the current situation.

• Cash rebates may continue to create advisers‟ bias as advisers may be biased in selecting those propositions with higher levels of

rebates and this may place advisers under a lower pricing pressure from customers.

• Pressure on advisers‟ to justify their remuneration risks being weakened, with potential implications for the pricing pressure they

apply upstream to funds and platforms‟ prices.

• It is recognised that in practice units may be converted to cash to fund platform or adviser charges. But this additional step preserves

a degree of separation and therefore transparency between these charges. In this way unit rebates require instead a more careful

explanation of unit value, may lead to greater customer engagement and awareness. However, this is at the expense of possible

transaction costs for encashing units to fund the cash account and the greater cost and complexity of administering unit rebates

relative to cash. Nevertheless, the importance of achieving greater customer engagement both post-RDR and post-ban is such that

these costs may be appropriate. It is for this reason that there may be greater engagement with unit rebates.

Opportunities for price obfuscation in the advised market

• The analysis above suggests that the bans are likely to increase transparency for funds and platforms‟ prices.

• As such, it is possible that funds and platforms may seek to apply price obfuscation strategies, for example by adopting a mix of fixed fee, proportional fees or a

multiplication of share classes for different investments such that charging complexity increases. The objective of these strategies would be to counterbalance the

effects of transparency on advisers‟ ability to use more transparent charges to their advantage and stimulate price competition in the market.

• These price obfuscation strategies may be mitigated by possible regulatory intervention and obligations on advisers imposed by the RDR. Moreover, market entry by

platforms (as indicated in the Market Background and Business Modelling Analysis) and increases in competition between platforms are likely to provide opportunities

for competing commercial offerings based on transparent charging. Advisers are likely to be incentivised to prefer more transparent charging structure where they are

under pressure from their customers to justify their charges and to a greater or lesser extent are concerned about loss of business to non advised channels. Finally,

the likelihood of price obfuscation may also be mitigated by the extra costs that implementing such strategies could generate for fund managers and platforms,

especially where obfuscation is realised through a multiplication of share classes.

Conclusions on impacts of the bans on price transparency

• The fund rebate ban is likely to lead to more explicit and transparent platform charges and this increases price transparency, allowing advisers to exercise increased

pressure on both funds and platforms.

• Countervailing actions by platforms to limit price transparency may arise, but these may generate additional costs for fund managers and platforms and are likely to be

countered by obligations on advisers imposed by the RDR and by increasing entry and competition levels in the market.

• Banning unit rebates could lead to a multiplication of share classes, which would reduce pricing transparency.

Continued from previous page

6.3 Prices – Post bans / advised markets : impact on price transparency

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6.3: Increased transparency over fund, platform and adviser charges may be expected to

encourage improved pricing levels in the market...

Ban type Impact on funds‟ price levels Impact on platforms‟ price levels

Ban to fund

rebates and

cash

rebates

• Funds‟ prices would only increase as a result of the rebate ban if the

market power of advisers after the bans is weaker than the market

power currently exercised by platforms through fund rebates.

• A number of considerations based on the previous analysis suggest

that this may not be the case:

• Increased price transparency, including higher visibility of a

potentially limited number of share classes, is expected to allow

advisers to exercise pressure on funds‟ prices.

• The analysis of advisers‟ selection criteria has indicated that they

will continue to apply price pressure on both platforms and funds as

a result of the bans. This pressure increases as a result of the bans

as advisers need to justify not just their adviser fee but also the fund

charge in the context of their advice. In this way, advisers are

subject to enhanced incentives to find price / quality offers for their

customers.

• This pressure, coupled with the changes generated by the RDR, is an

incremental driver to existing pressures and is likely to prove effective

in constraining funds‟ price levels.

• Platforms‟ total remuneration is now provided by unbundled prices instead of rebates

and would only increase as a result of the rebate ban if:

• The market power of advisers post bans is weaker than the market power exercised

by advisers in a post RDR world, such that platforms could expect to charge higher

prices.

• Limited (horizontal) competition in the platform market exists, allowing platforms to

increase prices without feeling the pressure of competitors.

• As noted in the column to the left, increased price transparency, including higher

visibility of a potentially limited number of share classes, is expected to both allow and

incentivise advisers to exercise pressure on platforms‟ prices.

• Competition and entry in the platform market is expected to increase.

• These pressures, coupled with the changes generated by the RDR, appear likely to

prove effective in constraining platforms‟ price levels. However, It remains to be

determined whether advisers and consumers will in practice act in this way, but on the

basis of the indications identified above this assumption has been made in this report.

If unit

rebates are

also

banned

• Banning unit rebates may provide funds with higher negotiation power

in the short term as they would not need to pay any rebates to

platforms or customers.

• In addition, funds could take time to set up different share classes and

prices could become sticky in the short/medium term.

• As such, without rebates, advisers‟ pricing pressure on the funds may

decrease and may not constrain funds‟ price levels as effectively as in

a scenario where unit rebates are allowed.

• As indicated in the analysis of charge structures, platforms are likely to suffer as a result

of the ban to unit rebates as either multiple share classes may impact their costs

negatively or a uniform share class may lead to high net worth customers looking for

alternative investment vehicles.

• Platforms may seek to respond to these negative implications through higher prices,

however competition levels and advisers‟ market pressure do not appear conducive to

higher platforms‟ prices.

• Having reviewed the impact of the bans on charge structure and transparency, the table below sets out the potential effect of the bans considered by the FSA on

funds and platforms‟ price levels.

• It considers the potential impacts of banning fund and cash rebates (allowing unit rebates), of also banning unit rebates, and of retaining cash rebates.

6.3 Prices – Post bans / advised markets : impact on price levels

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Key Market Economics

6.3: ...while banning unit rebates may weaken this expected trend

Ban type Funds‟ price levels Platforms‟ price levels

If cash rebates

are allowed

• As indicated in the analysis of price transparency, cash rebates

may continue to create bias for advisers.

• As such, under this scenario, the pressure on advisers‟ to justify

their remuneration may be weakened, with potential implications

for the pricing pressure they apply upstream to funds‟ prices.

• Advisers‟ incentives to apply pressure on funds may therefore

decrease.

• As indicated in the analysis of price transparency, cash rebates may continue to create

bias for advisers.

• Pressure on advisers‟ to justify their remuneration may therefore be weakened (see

analysis of price transparency), with potential implications for the pricing pressure they

apply upstream to platforms‟ prices.

• Price competition may also decrease as a result of advisers‟ incentives to retain the

same platform for new investment as they may benefit from cash account management

(in other words cash rebates continue to create bias).

Conclusion on impacts of the bans on price levels in advised markets

• The increased price transparency resulting from the bans is likely to allow and incentivise advisers to exercise increased pressure on both funds and platforms.

• Overall, combined with the RDR‟s changes to advisers‟ fee, increased transparency over fund, platform and adviser charges is likely to encourage more

competitive pricing levels in the market. These prices will need to reflect any changes to the cost of compliance with the bans.

• Banning unit rebates or retaining cash rebates may weaken advisers‟ pricing pressure and could lead to funds being able to defend their margins more effectively.

Continued from previous page

6.3 Prices – Post bans / advised markets : impact on price levels

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Key Market Economics

6.4: In non-advised markets, the bans will lead D2C platforms to charge an unbundled price to

customers. This may add pressure on D2C platform charges...

Implications of the bans on non-advised business models

• As described in the Business Model Analysis, the fund rebate ban leads to a shift in the non-advised platforms‟ business models.

• This is mainly due to the unbundled customer charges that result from banning any payments from funds, as these require establishing enhanced customer interfaces

in order to ensure that revenue collection from customers replaces current revenue collection for funds.

Implication of the bans on the charging structure

• Against this background, the most relevant impact of the bans on non-advised platforms is that platforms initiate or increase charging customers directly through an

unbundled charge for their services.

• As such, customers will be presented with a price for a service they may have previously perceived to be provided for „free‟ or at a minimal cost to themselves: in this

sense, unbundled platform charges increase in level from a perceived “zero” charge.

Implications of bans on charging transparency

• The full transparency of the customer charges that D2C platforms will charge is likely to increase customers‟ awareness of the platform charges.

• This may lead to higher customer involvement and potentially to more transparent customer/provider dynamics on levels of service required, in particular for more

price sensitive customers who would be likely to demand greater understanding of the explicit fee.

• Platforms are therefore likely to face higher scrutiny from customers who are used to receiving this service for „free‟ or at a minimal cost to themselves, and D2C

platforms may need to demonstrate more clearly to the customer the value of their services. This pressure is likely to contribute to contain excessive price increases.

• There are a number of strategies that D2C platforms can adopt to reduce pricing pressure on them:

• First, increased customer awareness, combined with a need to recover the costs imposed by the bans, may lead to price segmentation strategies from D2C

platforms, whereby high value customers may be charged more than other customers and receive higher quality services. Lower prices for low-value customers

may correspond to a reduction in the scope of the services offered. This is unlikely to lead to anticompetitive price increases as customers will be competed for on

the price/quality levels offered by the platform.

• Alternatively, platforms may seek to obfuscate their charges, for example by adopting a mix of fixed fee and proportional fees for different investments such that

charging complexity increases. This possibility is expected to be mitigated by the costs platforms would incur in implementing these pricing strategies (especially if

multiple share classes are implemented), by market entry and by increases in competition levels that are expected in the market in the short term, providing

opportunities for “transparent charging” commercial offerings. Given more transparent pricing in advised markets, it may be expected that non advised platforms

will need to follow suit to retain their customers.

• The next two pages discuss the expected effects and implications of the bans on pricing in the non-advised market and describe expected impacts on the charging

structure and levels for D2C platforms.

6.4 Prices – Post bans / non-advised markets

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Key Market Economics

6.4: ...and increases the risks of non-advised customers shifting to adjacent markets

Implications of bans on charging transparency (continued)

• An implication of unbundled platform charges is that this increased transparency may be perceived to place D2C platforms at a disadvantage with regards to

investment vehicles in adjacent markets that will continue to obtain revenues through fund rebates and that will continue to charge unbundled prices.

• There are two reasons why customers may move to adjacent markets:

• Informed customers: when unbundled charges in the platform market are revealed, some customers may determine that they are not willing to pay that amount for

platforms services and are content with the lower service / lower price options offered in adjacent markets.

• Uninformed customers who respond negatively to the complexity of unbundled charges, and prefer the „simpler‟ bundled price which will continue to be offered in

adjacent markets.

• D2C platform services continue to differ from adjacent markets and this may mitigate to some extent but not entirely this effect (see Issue #7). In any event, where

adjacent markets are able to offer a bundled but competitive price/quality offering, then an increase in their demand is likely to be an appropriate competitive outcome.

Implication of the bans on the charge level

• In D2C markets, platform charges increase from the currently perceived “zero” (or minimal) level as a result of the fund rebate ban.

• Excessive price increases would only occur if D2C platforms‟ market power was unconstrained, but:

• The current “zero price” levels imply that as a result of the bans D2C platforms will need to justify an unbundled price by further demonstrating value and doing so

more effectively than in the current and post RDR world.

• Competition between D2C platforms is expected to increase along with the development of new unintermediated propositions from advised platforms. While bans

may reduce profitability, current levels of profitability for some D2C participants appear significant and the market has scope for further entrants. The bans are

unlikely to change this trend.

• As such, strategies aimed at obfuscation of charges are expected to be competed away by new entrants, but the FSA will need to continue to monitor obfuscation

behaviours.

• On balance, risks of anticompetitive price increases in the D2C platform market as a result of the bans appear limited.

Conclusions

• The most relevant impact of the bans on non-advised platforms is that platforms start charging and/or increase charges for customers directly for their services.

• Platforms are therefore likely to face higher scrutiny from customers who may currently perceive they receive this service “for free” or at a minimal cost to themselves,

and as such D2C platforms will need to demonstrate more clearly to the customer the value of their services. This pressure is likely to contribute to containing

excessive price increases.

• Strategies for price obfuscation are likely to be mitigated by market entry and increases in competition levels that are expected in the market in the short term,

providing opportunities for commercial offerings based on transparent charging.

• Finally, there is a higher risk that those customers in the D2C market that are more price sensitive may react to the unbundled charge by shifting to adjacent markets

than may be the case for advised customers (see Issue #7), but for such customers this is likely to be an appropriate competitive outcome.

6.4 Prices – Post bans / non-advised markets

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Key Market Economics

7: Platforms’ customers recognise the difference between the services provided by platforms

and by investment vehicles in adjacent markets

7. Adjacent markets

• The next two pages review the extent of the impact of the bans on demand substitution between the platform market and the adjacent markets considered in this

analysis.

• In the Market Background Analysis, each of the adjacent markets indicated by the FSA for inclusion in this study has been described.

• While recognising the differences between the adjacent markets included in the analysis, for the purpose of the Competition Analysis general trends to substitution

across the markets where the bans do not apply have been considered, since all these markets share an analogous product offering with platforms.

Current differentiation with respect to adjacent markets

• The Market Background Analysis has indicated that service differentiation between platforms and adjacent markets is perceived by both direct customers and

advisers.

• They have reported that the main differentiators between platforms and adjacent markets include:

• The additional services that platforms provide when advisers purchase an investment product.

• The ability of customers to manage their whole range of personal investments (through many products) through platforms (as opposed to having to manage a

collection of separate single investments).

• As such, platform customers appear to recognise that the path to purchasing the products (in other words the services required to purchase the product) sufficiently

differentiates platforms from other adjacent markets. These considerations suggest that currently advisers and customers perceive a service differentiation between

platforms and adjacent markets.

• This finding appears reinforced by the fact that, recognising this difference, providers in adjacent markets (life companies) are moving into the platform market.

Differentiation with adjacent markets post RDR

• The RDR does not impose any changes to the nature of the services provided by platforms.

• Interviews with advisers and platform operators have suggested that additional functionality and quality of administrative support will remain a key selection criteria

when choosing platforms, particularly for smaller adviser firms.

• This is expected to increase post RDR as a result of the consolidation of advisers and as a result of changes in the nature of individual advisers‟ roles, which may

focus more on recruiting customers than on managing/selecting investment (for which they increasingly rely on platforms).

• As such, it is expected that platforms will continue to be perceived by advisers as a differentiated service from adjacent markets as a result of their wider service

offering (administration services, portfolio consolidation, research etc.).

• Therefore, advisers and customers recognise the service difference between platforms and adjacent markets in a post RDR world.

Differentiation with adjacent markets post bans

• The bans do not affect service differentiation between platforms and adjacent markets as they only affect payment transactions between platforms and funds, and

between platforms and customers.

• As such, the key impact of the bans on differentiation is that they lead to platforms unbundling their charges to customers, while prices in adjacent markets where fund

rebates occur but are not banned would continue to reflect the extra revenue gained by the entity through fund rebates and would remain bundled.

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Key Market Economics

7: The risks of shifting investment to adjacent markets as a result of the bans are limited for

advised customers but appear higher for non-advised customers

Key conclusions on substitution with adjacent markets:

• Advisers and customers currently and post RDR are likely to recognise the service difference between platforms and adjacent markets: while products are close

substitutes, it is recognised that the path to purchasing the products (namely the services required to purchase the product) sufficiently differentiates platforms from

other adjacent markets.

• While the bans may increase the perception of a price differential for a similar product between platforms and investment vehicles in adjacent markets that are not

impacted by the bans, in the advised market the perception of service differentiation appears likely to remain sufficient such that substitution with adjacent markets

does not appear a significant risk.

• In non-advised markets, (where customers may be expected to be more price sensitive, informed and to some extent self-reliant) then the risk of substitution to

adjacent markets appears higher, although this may be mitigated by increased customer awareness of platforms‟ functionalities.

Differentiation with adjacent markets post bans (continued)

• Where fund rebates are in place, currently prices for platforms and investment vehicles in adjacent markets both reflect revenues received through fund rebates.

• Once the fund rebate ban is imposed, the price differential between platforms and vehicles in adjacent markets for investing in similar products will become more

transparent because platforms‟ prices after the ban are more visible. This effect is particularly important in D2C markets where prices will increase from a perceived

“zero” level.

• This could trigger substitution from price sensitive advisers and customers.

However, in the advised market:

• Market research and interviews with advisers and market experts suggest that advisers will continue to recognise the service differentiation offered by platforms.

• As such, while platform services remain sufficiently differentiated, significant substitution with adjacent markets is unlikely to be triggered as a result of the bans.

In the non advised market:

• The absence of advisers to help customers understand the different pricing structures as well as the extra services provided by platforms may increase switching to

non-adjacent markets.

• This may apply in particular to those customers that are more price sensitive: in this case, switching to adjacent markets where service is still perceived to be

provided for „free‟ may be more likely.

• However, D2C platforms will need to justify an unbundled price by demonstrating value more openly and explicitly than in the current and post RDR world.

• This could lead to increased customer awareness which, combined with the facility offered by platforms to customers to manage their investment decisions using a

single tool, is expected to mitigate to some extent but not entirely the price sensitivity effect and to continue to act as a differentiator with respect to adjacent markets.

• Increased price awareness may also lead customers to consider whether they need the extra services provided by platforms. In those instances where they do not

value these services, they may switch to adjacent markets. However, this should be regarded as a positive competition impact driven by increased transparency.

7. Adjacent markets

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Key Market Economics

The analysis of the Key Market Issues provides a summary of the possible impacts of the bans

on competition in the market (i)

Advisers‟ platform selection criteria are not significantly impacted by the bans

• Perception of platform sustainability, service quality and price remain key drivers. The bans are likely to increase advisers‟ sensitivity to the quality/price trade off

offered by platforms given the increased price transparency. The unbundling of charges, by exposing advisers to increased pressure from customers, increases the

incentives for advisers (seeking to retain customers) to seek improved prices and services from funds and platforms.

• Advisers are likely to continue to focus their client investments on a limited number of platforms.

Platform costs will increase as a result of the bans

• The bans are not expected to lead to changes in set up costs to support new entry. These are dependant on the proposition being developed and are unlikely to be

considered a substantial barrier, as demonstrated by the continued trends to market entry currently experienced.

• Multiple share classes for the same fund on a platform are costly for platforms to manage (the cost of an additional share class is equivalent to the cost of adding

another fund) but there is unlikely to be a significant increase in share classes after the bans if unit rebates are allowed.

• While the costs of implementing unit rebates may be significant in the short term (between £500k and £1m), they appear to be lower in the long term than having to

manage multiple share classes for each fund. These costs are highlighted in the Business Modelling Analysis

• In the D2C market, the fund rebate leads to creation of significant new costs for platforms (such as the developing of customer facing operations related to payment

management).

Entry in the platform market is unlikely to be impacted by the bans

• Barriers to entry do not appear substantial and are unlikely to be affected by the bans, and further increases in the number of platforms is expected to continue.

• While trends to vertical integration may be reinforced as market pressure from advisers on platforms and funds increases, the market structure is unlikely to be

affected by the bans. This is contingent on D2C platforms adapting their business model successfully and costs being kept to a reasonable level (as discussed in the

Business Modelling Analysis.

The bans appear likely to reinforce the RDR trends towards an increase in the buyer power that advisers exercise on platforms and funds on behalf of their

clients or for customers in the D2C market

Post RDR, switching is likely to be simplified, and switching costs would appear to increase as a result of the bans only if they lead to a significant

multiplication of share classes in the market

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The analysis of the Key Market Issues provides a summary of the possible impacts of the bans

on competition in the market (ii)

Platforms‟ pricing structure and levels are expected to change as a result of the bans

• The fund rebate ban appears consistent with the creation under the RDR of a small number (or possibly only one additional) clean share classes, that act as

“headline prices”. If the RDR and the bans occur at the same time, it is possible that funds and platforms would move to create only one additional “unbundled ” share

class in response to the regulatory changes. Funds and platforms will take into account the extra costs of adding share classes together with competitive advantage

of offering a clear headline price. For this reason it is to be expected that, responding to price pressure, funds will wish to make use of unit rebates alongside their

clean share class.

• The fund rebate also leads to more explicit and transparent platform charges. This increased price transparency allows advisers to exercise increased pressure on

both funds and platforms. Overall, combined with the RDR changes to advisers‟ fees, increased transparency over fund, platform and adviser charges is likely to

encourage more competitive pricing levels in the market. These prices will need to reflect changes to the cost of compliance with the bans.

• Countervailing actions by platforms to limit price transparency may arise, but these may generate additional costs for fund managers and platforms and are likely to

be countered by obligations on advisers imposed by the RDR and by increasing entry and competition levels in the market

• Banning unit rebates would lead to a multiplication of share classes, which would reduce pricing transparency, increase platform costs through a multiplication of

share classes and may increase funds‟ bargaining power through pricing complexity and increasing switching costs for consumers.

• Retaining cash rebates may be likely to reduce customer awareness of discounts and may weaken advisers‟ incentives to exercise price pressure on funds.

Adjacent markets would appear to benefit from only limited demand substitution as a result of the bans

• Bans would not appear to affect service differentiation between platforms and adjacent markets but may increase the perception of a price differential between them.

• The risks of shifting investment to adjacent markets as a result of the bans appear limited for advised customers but appear higher for the more price sensitive D2C

customers.

Continued from previous page

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Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Introduction 129

Key Market Economics 131

Competition Concerns 160

Conclusions 176

Appendices 179

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Competition Concerns

The key competition concerns that have been identified focus on the impacts of the bans on

possible opportunities for elimination of competition, abuse of dominance, collusion and

quality reduction

Competition concern Description of how a concern may be triggered by the bans

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Foreclosure of access to platforms for

funds

• As a result of the bans, platforms face reduced incentives to host less profitable funds (with low volumes) on their system.

• The bans reduce platforms‟ profitability because customer fees do not fully replace fund rebates and so also lead to a reduction in the number of

platforms for funds to be placed on.

• Less profitable platforms are not able to survive due to financial pressure and have to exit the market.

• Vertically integrated platforms apply foreclosure of third party funds to reduce competition between funds and favour their own funds.

Distortion of competition by reducing

revenue / raising costs for platforms

relative to adjacent markets

• Following the bans, platforms‟ profitability decreases due to the removal of fund rebates.

• Removal of cash rebates also acts to reduce attractiveness to advisers, who can still benefit from rebates using by moving to adjacent markets.

• The bans applied to platforms have the effect of reducing the competitiveness of platforms compared to alternative distribution channels.

Abuse o

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inance Barriers to entry lead to limitations to

platform /horizontal competition

resulting in price distortions

• Advisers continue to use a small number of platforms.

• Following the bans, platforms‟ revenues decrease in the short term.

• The bans make fees more transparent and collusion on pricing practices (charge types and levels) becomes easier.

• Platforms seek to retain investors by increasing switching costs and barriers (beyond re-registration fees) or by locking consumers in.

• Platforms have scope to increase fees in the long term, and limitations to competition in platforms may also lead to increases in funds‟ prices.

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Distortion of competition by raising

fees for customers

• Following the bans, advisers behave as agent of their clients and, other things equal, select the cheapest platform.

• However, unit rebates are not widely used because of operational difficulties and transaction costs.

• This leads those platforms that are willing to pass on discounts to consumers to negotiate different share classes with fund managers.

• This, in turn, increases switching costs and reduces the extent to which price competition takes place in the market resulting in higher prices for

consumers in the long term. This may also lead to increases in funds‟ prices.

Qualit

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Consumer / adviser choice of

investment opportunities is limited

• The bans trigger a reduction in number of platforms, which may reduce scope for investment opportunities.

• It also changes the relative benefit for a platform to host a number of less profitable funds, and platforms could drop funds from their offering.

• Choice of investment opportunities could be reduced.

Quality of service to advisers and

consumers is adversely affected

• Following the bans, platforms‟ profitability is reduced due to the removal of fund rebates.

• This increases barriers to entry and leads to concentration among platform providers.

• In a more concentrated market, platforms reduce administration and other services to advisers for the same price.

• This requires additional workload for advisers, who charge consumers for the added effort.

• The following table sets out the concerns that have been identified based on the theories of consumer harm.

• It also discusses how the implementation of the bans may potentially increase the probability of the materialisation of these concerns, which will be assessed in the

next pages.

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Competition Concerns

Based on the analysis of the key market issues, each competition concern is tested to assess

whether the bans increase the risks of anticompetitive behaviours or lead to benefits for

competition and consumers

• The next pages report our assessment of the competition concerns identified in the competition framework.

• For each concern, the effects that are due to the RDR are separated from effects that are due to the fund rebate ban and the cash rebate ban, as this allows to

identify the incremental impacts that are due solely to the bans.

• The assessment is based on the application of qualitative economic reasoning to the findings discussed in the key market issues analysis. This analysis is not

repeated ex novo but the results are clearly referenced.

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Th

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Competition Analysis

163

Competition Concerns

Testing whether a concern materialises as a result of the bans relies on evidence and

conclusions from the key market issues and on the analysis of stakeholders’ behaviours post

RDR and post bans

Competition concern Key market issues employed to assess the concerns

Foreclosure of access to platforms for funds

• Impacts of the bans on market entry (Issue #3)

• Impacts of the bans on advisers‟ demand for fund variety (Issue #1)

• Impacts of the bans on platforms„ costs (Issue #2)

• Existing fund foreclosure that would be eliminated as a result of the bans

• Business Model Analysis

Distortion of competition by reducing revenue / raising costs for

platforms relative to adjacent markets

• Impacts of the bans of adjacent markets (Issue #7)

• Impacts of the bans on platforms„ costs (Issue #2)

• Business Model Analysis

Barriers to entry lead to limitations to platform /horizontal

competition resulting in price distortions

• Impacts of the bans on market entry (Issue #3)

• Impacts of the bans advisers‟ demand for fund variety (Issue #1)

• Impacts of the bans on buyer power (Issue #4)

• Impacts of the bans on pricing (Issue #6)

Distortion of competition by raising fees for customers • Impacts of the bans on market entry (Issue #3)

• Impacts of the bans on advisers‟ demand for fund variety (Issue #1)

• Impacts of bans on buyer power (Issue #4)

• Impacts of bans on pricing (Issue #6)

Consumer /adviser choice of investment opportunities is limited

• Impacts of the bans on market entry (Issue#3)

• Impacts of the bans on advisers‟ demand for fund variety (Issue #1)

• Foreclosure of access to platforms for funds (Concern 1)

Quality of service to advisers and consumers is adversely

affected

• Impacts of the bans on advisers‟ demand for service quality (Issue #1)

• Impacts of the bans on platforms„ costs (Issue #2)

• Foreclosure of access to platforms for funds (Concern 1)

• The table shows the key information that has been employed to evaluate each concern.

• The full set of hypotheses that were set out to analyse these concerns is reported in the Appendix 3.

Elim

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Ta

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Abuse o

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Qualit

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The bans do not appear to increase risks of fund foreclosure....

• The assessment of whether foreclosure of access to platforms for funds is likely to arise as a result of the bans or whether the bans will lead to benefits for competition

and consumers is presented below.

Concern 1: Foreclosure of access to platforms for funds

Existing trends

• The analysis of market entry indicates that, in the short /medium term, increases in platform numbers will continue and consolidation is not expected.

• The tendency to vertical integration discussed in the market entry analysis leads to more fund managers being expected to have direct access to the platform market,

which is likely to increase the opportunity for them to place their own fund on platforms.

• As shown in the Market Background Analysis, the distribution of assets on platforms is currently concentrated around a relatively small number of funds, and yet this

has not led to reductions in funds numbers.

Impacts of the RDR

• The analysis of advisers‟ platform selection criteria has indicated that on balance advisers are expected to continue to demand fund variety on platforms as a result of

the RDR, and to continue to require access to the funds demanded by their customers, including low cost funds.

• Therefore, as competition in the platform market increases, fund variety is likely to remain relevant for advisers.

• As such, the RDR does not appear to trigger significant changes in how platforms select and add funds to platforms and in advisers‟ demand for fund variety.

Anticompetitive foreclosure of funds is therefore not expected post RDR.

Impacts of fund rebate ban

• The bans do not appear to impact on continued market entry and on demand for fund variety discussed above for the RDR, as explained in the analysis of advisers‟

selection criteria and in the market entry analysis.

• One effect of the bans is to eliminate payments from funds, including set up fees and other administration fees and require platforms to charge unbundled fees to

advisers and customers. While these factors may increase cost control from platforms, the Business Model Analysis has indicated that profitability is not expected to

be negatively impacted for platforms as a result of the bans, principally due to expected market growth.

• The platform cost analysis has also indicated that, while the fund rebate ban and the ban to any payments from funds to platforms may change the marginal benefit of

adding a fund to the platform, the relative cost of adding a funds suggests that the cost saving that would be achieved by excluding a fund remains lower than the

marginal benefits of including a fund.

• As such, it is expected that these cost implications are not likely to impact fund variety on platforms following the bans.

• In addition, discussions with market operators have indicated that the ban may lead to funds that currently object to paying rebates to platforms finding it easier to

access platforms for distribution1.

• In consideration of these factors, fund foreclosure appears unlikely as a result of the bans. 1 Vanguard has recently been added to Hargreaves Lansdown platform, but not on

other advised platforms.

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Competition Concerns

...and the fund rebate ban may lead to funds currently not paying rebates to platforms finding it

easier to access platforms

Impacts of banning unit rebates

• As discussed in the pricing analysis, if unit rebates are not available and operators multiply share classes, platforms‟ costs may substantially increase. The marginal

cost of adding/managing a fund increases as each fund would require managing more share classes in this scenario. This may more markedly lead to fund foreclosure

with the objective of controlling fund management costs, although funds currently objecting to paying rebates are still likely to become available on platforms.

• Therefore, even in this scenario, market operators expect that market demand for fund variety would counterbalance this effect but pressure to reduce the number of

funds on a platform may in this case be higher.

Conclusions on fund foreclosure

• On balance, the proposed bans do not appear likely to increase risks of fund foreclosure because:

• Entry in the platform market, including from vertically integrated fund managers, increases opportunities for funds to find a distribution platform. This is not impacted

by the bans.

• Advisers and customers‟ demand for fund variety is likely to continue to be strong and is not going to be impacted by the bans.

• The limited marginal cost of adding funds for platforms indicates that that the cost savings that would be achieved by excluding/removing a fund remains lower than

the marginal benefits of including a fund.

• The fund rebate is likely to lead to funds that are currently not paying rebates to platforms finding it easier to access platforms for distribution.

Concern 1: Foreclosure of access to platforms for funds

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The bans do not affect service differentiation between platforms and adjacent markets...

• The assessment of whether distortion of competition by reducing revenue/raising costs for platforms relative to adjacent markets is likely to arise as a result of the bans

or whether the bans will lead to benefits for competition and consumers is presented below.

Concern 2: Distortion of competition by reducing revenue/raising costs for platforms relative to adjacent markets

Impacts of the RDR

• As discussed in the analysis of adjacent markets, the RDR does not impose any changes to the nature of the services provided by platforms.

• The analysis of adjacent markets also concluded that advisers and customers are expected to continue to recognise the service difference between platforms and

adjacent markets in a post RDR world.

Impacts of the fund rebate and the cash rebate bans

• This competition concern arises in relation to those investment vehicles in for adjacent markets for which the bans do not apply, and which can continue to receive

fund rebates directly from funds. Consequently, charges for these providers would not require a full unbundling and would continue to reflect the rebates collected

directly from funds.

• For this concern, the impacts of the bans are addressed separately for advised and non-advised platforms as the different features of these platforms may lead to

different implications.

Advised market

• As discussed in the analysis of adjacent markets, market research and interviews with advisers and market experts suggest that advisers will continue to perceive the

service differentiation offered by platforms. As such, services will remain perceived as sufficiently differentiated and significant substitution with adjacent markets is

unlikely to be triggered as a result of the bans.

• The pricing analysis has indicated that the existing trend in platform remuneration is not expected to change as a result of the bans. While higher transparency may

lead to unbundled platform prices to being perceived as higher than in adjacent markets, platform services will continue to be perceived differently. This does appear

likely to lead to adverse revenue impacts for platforms.

• As such, the bans do not appear likely to trigger a direct effect on platform revenues that disadvantages platforms compared to adjacent markets. However, the bans

do require platforms to change the way in which they earn such revenues (from fund rebates to unbundled customer charges).

• The platform cost analysis indicates that the bans may lead to the creation of additional cost categories for platforms and funds, and in particular costs related to the

implementation of unit rebates. While in the long run these seem lower than the costs of managing multiple share classes, platforms will have to incur these costs to

comply with regulation.

• The platform cost analysis indicates that if unit rebates are banned, platform costs may increase more markedly. These would include the potential costs to manage

multiple share classes should share classes increase as a result of the bans (as noted in the pricing analysis, the bans are not expected to lead to a multiplication of

share classes unless unit rebates are banned): these costs do not appear insignificant for funds, while for platforms managing more than one share class for a fund is

equivalent to a cost duplication and may lead to substantial cost increases.

• These cost categories may raise the differential costs for platforms relative to adjacent markets.

Competition Concerns

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... but they do appear to raise the costs of platforms relative to adjacent markets, especially for

D2C platforms

Competition Concerns Concern 2: Distortion of competition by reducing revenue/raising costs for platforms relative to adjacent markets

Non advised market

• As indicated by the pricing analysis, the effect of the bans on D2C revenues is similar to the advised market on the revenue side: revenues do not appear to be

reduced for platforms relative to adjacent markets, but the bans do require platforms to change the way in which they earn such revenues (from fund rebates to

unbundled customer charges).

• It is however recognised that, for those D2C customers in the non advised markets that are more price sensitive, the risk of migration to adjacent markets appears to

be higher as they may not fully perceive the service difference between platforms and investment vehicles in adjacent markets.

• However, unbundled charges are likely to lead platforms to have to justify their commercial proposition more clearly, which could lead to increased customer

awareness. This increased awareness, combined with the facility offered by platforms to customers to manage their investment decisions using a single tool (i.e. the

platform), is expected to mitigate to some extent but not entirely the price sensitivity effect and to continue to act as a differentiator with respect to adjacent markets.

• Increased price awareness may also lead customers to consider whether they need the extra services provided by platforms. In those instances where they do not

value these services, they may switch to adjacent markets. However, this should be regarded as a positive competition impact driven by increased transparency.

• On the cost side, the Business Model Analysis has indicated that D2C platforms will need to establish enhanced customer interfaces in order to ensure that revenue

collection from customers replaces current revenue collection for funds. These costs may be significant.

• In conclusion, the fund rebate ban does appear to raise the costs for D2C platforms relative to adjacent markets.

Conclusions on distortion of competition with adjacent markets

• The bans do not appear to affect service differentiation between platforms and adjacent markets.

• While the bans may change the way in which revenues are obtained by platforms, they do not appear to be conducive to a reduction in revenues compared to

adjacent markets where rebates are not banned. The risk of more price sensitive customers switching to adjacent markets as a result of unbundled platform prices

appears higher for D2C platforms.

• The bans do appear to raise the costs of platforms relative to adjacent markets. If unit rebates are allowed, these costs appear relatively limited for advised platforms.

• For D2C platforms, the fund rebate ban does appear to raise the costs for D2C platforms relative to adjacent markets as these platforms may require establishing

enhanced customer interfaces in order to ensure that revenue collection from customers replaces current revenue collection for funds, at some additional cost.

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Sustained entry and increased price transparency as a result of the bans do not appear to

increase the risks of anticompetitive fee increases for consumers (i) • The assessment of whether a distortion of competition by raising fees for customers is likely to arise as a result of the bans or whether the bans will lead to benefits

for competition and consumers is presented below.

Concern 3: Distortion of competition by raising fees for customers

Impacts of the RDR

• The analysis of market entry indicates that, in the short /medium term, increases in the number of platforms will continue and consolidation is not expected post RDR.

• The analysis of advisers‟ platform selection criteria indicates that, as a result of the RDR, advisers become more price sensitive as they need to justify their commercial

proposition to customers in the context of their fees.

• The pricing analysis also concluded that overall the RDR, by making advisers more focussed on value, reinforces existing price trends and is not expected to create

major changes on charge levels.

Impacts of the fund rebate and cash rebate bans

• As noted in the market entry analysis, the bans are not expected to increase the barriers to entry and constrain further entry (including from funds) in the short/medium

term for both advised and non-advised markets.

• The market entry analysis also indicates that the bans may marginally reinforce the existing trends to vertically integrated entry or to vertical integration of existing

platforms with fund providers. However, it concluded that vertical integration between platforms and funds in response to the higher price pressure exercised by

advisers, is not necessarily intended to support higher prices for the integrated entity or aimed at excluding funds, but would rather be aimed at retaining existing levels

of remuneration upstream against the threat of increasing price pressure from downstream in the distribution value chain (i.e. from the advisers).

• The analysis of advisers‟ selection criteria indicated that advisers will continue to apply price pressure on both platforms and funds as a result of the bans. This pressure

increases as a result of the bans as advisers need to justify not just their adviser fee but also the unbundled platform charge to customers in the context of their advice.

The unbundling of charges, by exposing advisers to increased pressure from customers, increases the incentives for advisers (seeking to retain customers) to seek

improved prices and services from funds and platforms. In summary, as discussed further in the pricing analysis, increased price transparency helps escalate this

pressure.

• The pricing analysis indicated that the bans are likely to lead to increased funds and platforms‟ price transparency. However, given the relatively unconcentrated market

structure, this does not appear conducive to collusion as this increased transparency allows advisers and customers to exercise pressure on funds and platforms‟ prices

and is likely to lead to more effective market pressure on charges. This pressure exercised by customers or by advisers on behalf of their customers, coupled with the

changes generated by the RDR, appears to replace the pricing pressure that platforms are currently imposing on funds through fund rebates.

• The pricing analysis and the analysis of buyer power in the platform value chain also indicate that platforms‟ pressure on funds is still exercised, albeit not through fund

rebates but through negotiation of more transparent “headline prices”, (through negotiations on share classes) and unit rebates.

• The pricing analysis concluded that overall, combined with the RDR changes to advisers‟ fee, increased transparency over fund, platform and adviser charges is

expected to encourage more competitive pricing levels in the market.

• The analysis of adjacent markets indicated that, while there is sufficient service differentiation between the platform market and adjacent markets, price increases in the

platform market would be constrained to some extent by adjacent markets as the bans lead to higher visibility of platform's prices, especially for D2C market, which

platforms will need to justify more explicitly.

• In consideration of these factors, the fund rebate ban is not expected to increase the risk of distortion of competition leading to higher fees for customers. Instead, the

expected increased pricing pressure may result in lower prices than would otherwise be the case, depending on the extent to which customers and advisers in practice

exercise pricing pressure through the supply chain.

Competition Concerns

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Sustained entry and increased price transparency as a result of the bans do not appear to

increase risks of anticompetitive fee increases for consumers (ii)

Concern 3: Distortion of competition by raising fees for customers

Impacts of the cash rebate ban

• As described in the pricing analysis, changes in existing proposals may increase the risks of anti-competitive price increases if:

• Unit rebates are not allowed, since there is a risk that multiplication of share classes may lead to over-complexity in platform pricing and to increases in switching

costs for advisers, thereby increasing opportunities for investment lock in with existing platforms. This risks weakening price competition and may also contribute

to raising barriers to entry in the market, potentially leading to further reductions in competition levels with potential adverse impacts on price levels.

• Cash rebates are retained, as advisers‟ bias and low levels of customer engagement would decrease market pressure from advisers to funds and platforms‟

prices.

Conclusions on distortion of competition by raising fees for customers

• The bans do not appear conducive to a reduction in competition levels in the platform market as they do not appear to impact barriers to entry. While they may

marginally reinforce trends to upstream vertical integrated platforms, this is not necessarily intended to support higher prices for the integrated entity or aimed at

excluding funds but would rather be aimed at retaining existing levels of remuneration upstream against the threat of increasing price pressure from downstream in the

retail distribution value chain.

• While price transparency is expected to increase as a result of the bans, this does not appear to risk leading to collusion but gives advisers further scope to apply price

pressure on funds and platforms‟ charges. Countervailing actions by platforms to limit price transparency may arise, but these may generate additional costs for fund

managers and platforms and are likely to be countered by obligations on advisers imposed by the RDR and by increasing entry and competition levels in the market.

• The analysis of adjacent markets has indicated that, while there is sufficient service differentiation between the platform market and adjacent markets, price increases

in the platform market would be constrained to some extent by adjacent markets as the bans lead to higher visibility of platform's prices, especially for the D2C market,

which platforms will need to justify more explicitly.

Competition Concerns

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Sustained entry and increased price transparency as a result of the bans do not appear to limit

platform competition in ways that may result in price distortions (i)

Competition Concerns

• The assessment of whether barriers to entry lead to limitations to platform /horizontal competition resulting in pricing abuses as a result of the bans or whether the bans

will lead to benefits for competition and consumers is presented below.

Concern 4: Barriers to entry lead to limitations to platform /horizontal competition resulting in pricing abuses

Impacts of the RDR

• The analysis of market entry indicates that, in the short /medium term, increases in the number of platforms will continue and consolidation is not expected post RDR.

• The analysis of advisers‟ platform selection criteria indicates that, as a result of the RDR, advisers become more price sensitive as they need to justify their commercial

proposition to customers in the context of their fees.

• The pricing analysis also concluded that overall the RDR, by making advisers more focussed on value, reinforces existing price trends and is not expected to create

major changes in charges levels.

Impacts of the fund rebate and cash rebate bans

• As noted in the market entry analysis, the bans are not expected to increase the barriers to entry and constrain further entry (including from funds) in the short/medium

term for both advised and non-advised markets.

• In particular, the platform cost analysis has indicated that the bans do not change the set up costs that are sunk when entering the platform market. These are

dependant on the proposition being developed and are unlikely to be considered a substantial barrier, as demonstrated by the continued trends to market entry currently

experienced.

• The market entry analysis also indicates that the bans may marginally reinforce the existing trends to vertically integrated entry or to vertical integration of existing

platforms with fund providers. However, it concluded that vertical integration between platforms and funds responds to the higher price pressure exercised by advisers,

is not necessarily intended to support higher prices for the integrated entity or aimed at excluding funds, but would rather be aimed at retaining existing remuneration

upstream against the threat of increasing price pressure from downstream in the retail distribution value chain (from the advisers).

• The market entry analysis has also indicated that, in the non-advised market, the fund rebate ban may lead to significant business model changes as D2C platforms

need to develop enhanced customer interfaces in order to ensure that revenue collection from customers replaces current revenue collection from funds. However, the

RDR is expected to lead to higher growth for D2C platforms, potentially balancing this effect. While this may create pressure on profitability, this is unlikely to constrain

further entry or the development of unintermediated propositions (due to the impact of the RDR noted above). In addition, the non-advised market currently comprises

relatively few players and exhibits higher profitability.

• As such, the bans are unlikely to lead to a structural reduction in the level of competition in the market.

• As discussed in the pricing analysis and in the analysis of Concern 3 (Distortion of competition by raising fees for customers ), the changes in charging structure and

levels that may occur as a result of the bans do not appear to increase the risks of collusion. As discussed in the pricing analysis, the increased transparency resulting

from the bans is expected to give advisers further scope to apply price pressure on funds and platforms‟ charges. The unbundling of charges, by exposing advisers to

increased pressure from customers, increases the incentives for advisers (seeking to retain customers) to seek improved prices and services from funds and platforms.

In summary, as discussed further in the pricing analysis, increased price transparency may be expected to help escalate this pressure.

• The analysis of adjacent markets indicated that, while there is sufficient service differentiation between the platform market and adjacent markets, price increases in the

platform market would be constrained to some extent by adjacent markets as the bans lead to higher visibility of platform's prices, especially for the D2C market, which

platforms will need to justify more explicitly.

• As such, the fund rebate ban does not appear likely to lead to limitations to horizontal competition resulting in pricing abuses.

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Sustained entry and increased price transparency as a result of the bans do not appear to limit

platform competition in ways that may result in price distortions (ii)

Competition Concerns Concern 4: Barriers to entry lead to limitations to platform /horizontal competition resulting in pricing abuses

Impacts of banning unit rebates

• As described in the pricing analysis, changes in the existing proposals may increase the risk of anti-competitive price increases if:

• Unit rebates are not allowed, since there is a risk that a multiplication of share classes may lead to over-complexity in platform pricing and to increases in

switching costs for advisers, therefore increasing opportunities for investment lock in with existing platforms. This risks weakening price competition and may

also contribute to raising barriers to entry in the market, potentially leading to further reductions in competition levels.

• Cash rebates are retained, as advisers‟ bias and low levels of customer engagement would decrease market pressure from advisers to funds and platforms‟

prices.

Conclusions on limitations to competition resulting in pricing abuses

• The bans do not appear conducive to a reduction in competition levels in the platform market as they do not appear to impact barriers to entry or entry costs. While

they may marginally reinforce trends towards upstream vertically integrated platforms, this is not necessarily intended to support higher prices for the integrated entity

or aimed at distorting competition in the platforms market but would rather be aimed at retaining existing levels of remuneration upstream against the threat of

increasing price pressure from downstream in the retail distribution value chain.

• While price transparency is expected to increase as a result of the bans, this does not appear to lead to collusion but gives further scope to advisers and customers to

apply price pressure on funds and platforms‟ charges. Countervailing actions by platforms to limit price transparency may arise, but these may generate additional

costs for fund managers and platforms and are likely to be countered by obligations on advisers imposed by the RDR and by increasing entry and competition levels

in the market.

• The analysis of adjacent markets has indicated that, while there is sufficient service differentiation between the platform market and adjacent markets, price increases

in the platform market would be constrained to some extent by adjacent markets as the bans lead to higher visibility of platform's prices, especially for the D2C

market, which platforms will need to justify more explicitly.

• Banning unit rebates appears to increase switching costs and while retaining cash rebates risks weakening price competition. It may also contribute to raising barriers

to entry in the market, potentially leading to further reductions in competition levels.

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As bans do not impact entry costs, existing entry trends and advisers’ demand for fund variety,

they are unlikely to lead to risks of reduction of funds or platforms...

Competition Concerns

• The assessment of whether the risk of limitations to consumer choice of investment opportunities is likely to arise as a result of the bans or whether the bans will lead

to benefits for competition and consumers is presented below.

Concern 5: Consumer choice of investment opportunities is limited

Existing trends

• The analysis of market entry indicates that in the short /medium term, increases in the number of platforms will continue and consolidation is not expected.

• The tendency to vertical integration discussed in the market entry analysis leads to more fund managers being expected to have direct access to the platform market,

which is likely to increase the opportunity for them to place their own fund on platforms.

• As shown in the Market Background Analysis, the distribution of assets on platforms is currently concentrated around a relatively small number of funds, and yet this

has not led to reductions in funds‟ numbers.

Impacts of the RDR

• The analysis of advisers‟ platform selection criteria has indicated that on balance advisers are expected to continue to demand fund variety on platforms as a result of

the RDR, and to continue to require access to a range of varied funds.

• Therefore, as competition in the platform market increases, fund variety is likely to remain relevant for advisers.

• As such, the RDR does not appear to trigger significant changes in how platforms select and add funds and in advisers‟ demand for fund variety.

• Consequently, post RDR investment choices both in terms of platforms and funds available are not expected to decrease.

Impacts of the bans

• The bans do not appear to impact the conclusions on continued market entry and on demand for fund variety discussed above for the RDR, as explained in the

analysis of advisers‟ selection criteria and in the market entry analysis.

• As noted in the analysis of Concern 1 (Foreclosure of access to platforms for funds), the proposed bans do not appear likely to lead to increased risks of fund

foreclosure:

• Entry in the platform market, including from vertically integrated fund managers, increases opportunities for funds to find a distribution platform. This is not

impacted by the bans.

• Demand for fund variety is likely to continue to be strong, especially from customers with specific investment needs.

• The limited marginal cost of adding/managing funds for platforms indicates that that the cost savings that would be achieved by excluding/removing a fund remains

lower than the marginal benefits of including a fund of reasonable attractiveness to investors.

• The fund rebate is likely to lead to funds that are currently not paying rebates to platforms finding it easier to access platforms for distribution.

• As such, the bans do not appear likely to lead to increased risks of reductions of investment opportunities available with regards to both platform choice or fund choice

in the market.

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...and do not appear to affect the choice of investment opportunities in the market

Competition Concerns

Impacts of banning unit rebates

• As discussed in the pricing analysis, if unit rebates are not available and operators multiply share classes, platforms‟ costs may substantially increase. The marginal

cost of adding/managing a fund increases as each fund would require managing more share classes in this scenario. This may more markedly lead to fund

foreclosure with the objective of controlling fund management costs, although funds currently objecting to paying rebates are still likely to become available on

platforms. Even in this scenario, market operators expect that market demand for fund variety would counterbalance this effect.

• However, a multiplication of share classes may lead to over-complexity in platform pricing and to increases in switching costs for advisers, therefore increasing

opportunities for investment lock in with existing platforms. This risks weakening price competition and may also contribute to raising barriers to entry in the market,

potentially leading to further reductions in the levels of competition.

• As such, the risk of reductions in the choice of investment opportunities appears to increase if unit rebates are banned.

Conclusions on limitations to investment opportunities

• The bans do not appear conducive to a reduction in competition levels in the platform market as they do not appear to impact barriers to entry.

• The bans also do not appear to lead to a reduction of funds available on platforms, as demands for fund variety remain high and funds that are currently not paying

rebates to platforms may find it easier to access platforms for distribution as a result of the bans.

• As such, the proposed bans do not appear conducive to a reduction of investment opportunities available to consumers.

• If unit rebates are banned, the risks of negative outcome on investment opportunities may increase.

Concern 5: Consumer choice of investment opportunities is limited

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The bans appear likely to lead to increased focus on service quality and pricing from platforms as a

result of increased price pressure from advisers in both the advised and non-advised markets (i)

• The assessment of whether quality of service to advisers and consumers is adversely affected as a result of the bans or whether the bans will lead to benefits for

competition and consumers is presented below.

Concern 6: Quality of service to advisers and consumers is adversely affected

Impacts of the RDR

• The analysis of market entry indicates that, in the short /medium term, increases in the number of platforms will continue and consolidation is not expected post RDR.

• As discussed in the analysis of advisers‟ platform selection criteria, interviews with advisers and platforms have suggested that additional functionality and quality of

administrative support remain a key selection criteria when choosing platforms, particularly for smaller adviser firms.

• This is expected to increase post RDR as a result of consolidation of advisers and as a result of changes in the nature of individual adviser roles, which may focus

more on recruiting customers than on managing/selecting investment (for which they increasingly rely on their network or platforms).

• Advisers have also reported that they do not consider adjacent markets as perfect substitutes for platforms in the provision of these services. As such, advisers are

expected to continue to recognise that platforms‟ service offering is differentiated from adjacent markets.

Impacts of the bans

• The bans do not appear to impact advisers‟ numbers and their operational restructuring, which are primarily driven by the RDR changes.

• As discussed in the analysis of advisers‟ platform selection criteria, the bans appear to reinforce the trend to the increased importance of service quality as advisers

need to justify the platforms‟ unbundled price to customers in the context of their advice, and as such will require a more detailed assessment of the performance

offered by the platforms.

• The increased platform price transparency resulting from the bans, as indicated by the pricing analysis, also contributes to increase advisers‟ sensitivity to the

quality/price trade off offered by platforms.

• As such, while the balance between quality and price varies depending upon the features of different advisers and customers groups and their investment needs, the

post RDR trends to increased relative sensitivity of advisers to platform quality and prices are expected to be reinforced by the bans.

• The pricing analysis has indicated the potentially beneficial effects of the bans on price transparency:

• The fund rebate ban leads to more explicit and transparent platform charges and this increases price transparency, likely to allow advisers to exercise

increased pressure on both funds and platforms.

• Countervailing actions by platforms to limit price transparency may arise, but these may generate additional costs for fund managers and platforms and are

likely to be countered by the obligations on advisers imposed by the RDR and by increasing entry and competition levels in the market.

Competition Concerns

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The bans appear likely to lead to increased focus on service quality and pricing from platforms as a

result of increased price pressure from advisers in both the advised and non-advised markets (ii)

Competition Concerns Concern 6: Quality of service to advisers and consumers is adversely affected

Impacts of the bans (continued)

• In the non-advised market, as discussed in the pricing analysis, platforms are likely to face higher scrutiny from customers who currently perceive they receive this

service for „free‟ or at a minimal cost to themselves, and as such D2C platforms will need to demonstrate more clearly to the customer the value of their services. This

pressure is likely to contribute to increase focus on quality (and contain excessive price increases).

• There is a higher risk that those customers in the D2C market that are more price sensitive may react to the unbundled charge by shifting to adjacent markets than

advised customers, as the former would not rely on adviser‟s advice to understand the key differences between services.

• On balance the fund rebate ban, leading to more transparent platform charges, encourages competition and focus on quality.

Impacts of banning unit rebates

• As discussed in the pricing analysis, if unit rebates are not available and operators multiply share classes, transparency may decrease, thus increasing complexity in

the market and leading to potential reductions in competition.

• As such, risks of quality reductions due to a lessening of competition appear to increase if unit rebates are banned.

Conclusions on reductions in service quality

• The bans do not appear likely to lead to a reduction in the number of platforms and, by making platform price more transparent, lead to platforms having to justify their

proposition more extensively than in a post RDR world. This appears to increase focus on service quality from platforms.

• Banning unit rebates or retaining cash rebates risks reducing competition levels, which could have negative implications on quality.

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Section Page

Glossary of Terms 3

Executive Summary 5

Introduction 18

Approach and Methodology 21

Market Background 28

Business Model Analysis 84

Competition Analysis 128

Introduction 129

Key Market Economics 131

Competition Concerns 160

Conclusions 176

Appendices 179

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Conclusions

In conclusion, the bans are unlikely to change the market structure but do affect market

behaviours...

Market structure is unlikely to be significantly impacted by the bans

• The bans do not appear to impact entry costs and to affect existing trends in market entry, especially in the D2C market (contingent on D2C platforms adapting their

business model successfully).

• The bans may reinforce existing trends to vertical integration in the market, but this is in part a defensive strategy on the part of the funds to preserve a route to market

and their existing margins, and is not necessarily intended to support higher prices for the integrated entity or aimed at excluding funds.

Market behaviours: the bans lead to changes in business models (especially for D2C platforms) and are likely to increase price pressure on funds and

platforms and to enhance price transparency

• As a result of the bans, platforms‟ prices are fully unbundled and become visible to customers, especially for D2C platforms, which leads to changes in platforms‟

business models and costs.

• The fund rebate ban appears consistent with the creation under the RDR of a small number (or possibly only one additional) clean share classes, that act as “headline

prices”. Funds and platforms will take into account the extra costs of adding share classes together with competitive advantage of offering a clear headline price. For

this reason it may be expected that, responding to price pressure, funds will wish to make use of unit rebates alongside their clean share class.

• Higher price transparency appears to support stronger adviser pressure on the price/quality offering. Given that no significant changes in market structure are

expected, risks of collusion in the platform market are expected to be limited. Higher price transparency therefore appears to lead to stronger competition and to

platforms having to justify their proposition more extensively than in a post RDR world. But it remains to be determined whether advisers and consumers will in

practice exercise the price pressure assumed in this report.

• Strategies for price obfuscation may generate additional costs for fund managers and platforms and are likely to be mitigated market entry and increases in

competition levels that are expected in the market in the short term, providing opportunities for commercial offerings based on transparent charging.

• Unit rebates increase customer awareness of remunerations, reduce advisers‟ bias and reduce risks of over complexity that would otherwise result from multiple share

classes. As such, it is expected that platforms and funds will move to implement unit rebates despite the initial implementation costs required, as unit rebates are less

costly for them to manage than adding additional share classes to reflect different remunerations for different investment levels.

• D2C platforms will incur costs such as the development of customer facing operations related to payment management, while all platforms will incur the cost of setting

up and managing unit rebates.

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Conclusions

... and appear likely to enhance the positive consumer outcomes of the RDR

Competition and consumer outcomes: the bans enhance the positive effects of the RDR on investment opportunities, service quality and prices, but risk

raising platforms' costs compared to adjacent markets

• The bans do not appear likely to increase risks of fund foreclosure and the fund rebate leads to funds currently not paying rebates to platforms finding it easier to

access platforms.

• As bans do not impact entry costs and existing entry trends, they do not appear likely to affect the choice of investment opportunities in the market.

• Sustained entry and increased price transparency as a result of the bans do not appear likely to increase risks of anticompetitive fee increases for consumers or to limit

platform competition in ways that may result in price distortions. This finding depends on advisers successfully exercising pressure on funds to compete on share

classes and unit rebates.

• However, removing unit rebates increases price complexity and switching costs, potentially reducing the benefits generated by the fund rebate ban.

• The bans are likely to lead to increased focus on service quality and pricing from platforms as a result of increased price pressure from advisers in both the advised

and non-advised markets.

• While the bans do not affect service differentiation between platforms and adjacent markets, they do appear likely to raise the costs of platforms relative to adjacent

markets, especially for D2C platforms.

• The introduction of unbundled and flat rate charges may lead to differential effects on different types of customer – for example, high value consumers may experience

different outcomes from low value customers. These more disaggregated impacts have not been explicitly considered in this report.

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Annex No.

Participating Market Stakeholders 1

Business Model Analysis Appendices 2

Competition Analysis Appendices 3

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Annex No.

Participating Market Stakeholders 1

Business Model Analysis Appendices 2

Competition Analysis Appendices 3

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In addition as described in the Business model Analysis section, we

approached a number of platforms in the market to provide us with revenue

and costs data. The companies in the sample, as agreed with the FSA, were:

• Ascentric

• CoFunds

• Fidelity Funds Network

• Hargreaves Lansdown

• Nucleus

• Standard Life

• Skandia

• Transact

In addition we also approached the following companies to provide information

on the other market participants caught by the bans:

• Association of Private Client Investment Managers and Stockbrokers

(“APCIMS”)

• Tax Incentivised Savings Association (“TISA”)

Appendix 1

181

Participating Market Stakeholders

As part of the information gathering process we held a series of interviews with

a number of stakeholders in the market. The list of stakeholders was agreed

between Deloitte and the FSA. The interviews were conducted with the

following companies between 18 October 2011 and 18 November 2011:

• ABI

• AJ Bell

• Ascentric

• Association of Discount Brokers (“AIDB”)

• Association of Private Client Investment Managers and Stockbrokers

(“APCIMS”)

• CoFunds

• Fidelity Funds Network

• Hargreaves Lansdown

• L&G

• M&G

• Nucleus

• Platforum

• Positive Solutions

• Sesame Bankhall Group

• Skandia

• Standard Life

• Suffolk Life

• Tax Incentivised Savings Association (“TISA”)

• Transact

• Vanguard

• Zurich

The analysis includes data and feedback from a number of market stakeholders

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Business Model Analysis Appendices Appendix 2

182

Annex No.

Participating Market Stakeholders 1

Business Model Analysis Appendices 2

Competition Analysis Appendices 3

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Category Item Source Drivers Description

Revenues

Initial fee Investors # new customers Initial fee paid by customers to join the platform

Initial charge

Ongoing/ platform fees

(Fixed charge)

# accounts Total annual fixed fees paid by existing costumers to

use the platform Single annual charge

Type

Core

platform

revenues

Ongoing/ platform fees

(Variable charge)

Total AUA Total annual variable fee paid by existing costumers to

perform transactions on the platform (either % of total

AUA or cost per transaction) Variable ongoing fees (bps)

Switching fees Total switching AUA Total fees paid when switching between different types

of financial vehicles Switching fees (bps)

Re-registration fees # accounts closure Total fees paid when exiting the platform to move

assets to another platform Exit fee

Administration fees Fund/ Product

Manager

# products Total administration fees paid by the fund/ product

managers to the platform Admin charge

Rebates

Volume of transaction Total rebates redistributed by fund/ product managers

to the platform (including advisor commission and

customer rebates when applicable) Average Rebate (bps)

Product start-up charge

# new products Charge paid by fund/ product managers to launch new

products on a platform Start-up charge

Other

revenues

Ancillary services Provision of additional services (e.g. Asset allocation,

risk profiling, CGT calculation, rebalancing,...)

Cash account interest Interest and other fixed income from cash accounts

Volume of transactions

Fee per transaction

Details have been asked to each platform service provider present in the sample about all their

sources and key drivers of revenue

Appendix 2 Business Model Analysis Appendices

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Category Item Sub-type Drivers Description

Costs

IT Fixed costs

N/A

Total IT fixed costs (Hardware, maintenance, etc)

Sales & Marketing Advertising, promotion and other communication costs

mainly related to the acquisition of new business

Type

Operational

costs

Other back-office costs General administrative expenses, outsourcing, legal,

etc

IT Variable costs # accounts Total IT variable costs (software, licensing, etc)

Licensing fee

People

# employees All fixed staff related costs (salaries, benefits, etc)

Avg cost per employee

Customer rebate

Volume of transaction Customer cash/ unit rebates redistributed.

Avg customer rebate (bps)

RDR/ rebate bans related costs

Commission to advisors

Volume of transaction In case the rebate received from product/fund

manager includes advisors' commissions, the latter

needs to be redistributed as part of cost Avg customer rebate (bps)

One-off costs One-off costs related to the development of new

solutions to comply with RDR and rebate bans

requirements (IT system redesign, etc)

Ongoing incremental

costs

Increment operational costs due to RDR and rebate

bans requirements(communication, reporting)

N/A

PP&E Leasehold land, buildings, property

Appendix 2 Business Model Analysis Appendices

N/A

Details have been asked to each platform present in the sample about all their types and key

drivers of costs

People Variable people costs as temporary staff, bonus, T&E

expenses, etc N/A

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Competition Analysis Appendices Appendix 3

185

Annex No.

Participating Market Stakeholders 1

Business Model Analysis Appendices 2

Competition Analysis Appendices 3

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Overview

Framework for competition analysis – overview

• This appendix describes the approach undertaken for

the analysis of the impacts of the bans on competition

in the platform market.

• This approach is based on the guidelines provided by

the Competition Commission (“CC”).

• The Competition Analysis does not require a

conclusive definition of economic markets (as per the

CC framework). Instead it is only necessary to identify

the principal services and market segments that are

affected by the bans and then to assess a limited set of

competition concerns. As such the approach does not

involve the same level of detail as the CC‟s.

• The approach includes four stages, which are

illustrated in the figure to the left and are described in

detail in the next pages.

• The processes involved in the Identification of Key

Market Economics consider the market pre and post

RDR, and, within the post RDR world, scenarios with

and without the ban to cash rebates and fund rebates.

• The assessment of competition is undertaken by

testing the likelihood of a limited set of competition

concerns that could arise in the market as a result of

the proposed bans.

• The results of this analysis are presented in a way that

allows identifying impacts on market structure, market

behaviours and consumer outcomes.

• The Remedial action phase is not in scope within this

study.

Competition Commission market investigation framework

1. Market definition

(a) Product market

(i) Demand-side

substitution

(ii) Supply-side substitution

(b) Geographic market

(c) Other aspects relevant to

market definition

(i) Chains of substitution

(ii) Different groups within

a market

(iii) Upstream and

downstream markets

2. Assessment of competition

(a) Intra-market rivalry: structural features

(i) Market shares and concentration

-Concentration measures

(ii) Other structural factors

(b) Barriers to entry, expansion and exit

(i) Natural or intrinsic barriers to entry or

expansion

(ii) Regulatory barriers to entry

(iii) Strategic barriers to entry

(iv) Effects of entry and expansion

(c) Countervailing buyer power

(d) Supplier power

(e) Vertical integration

(f) Switching costs

(g) Information asymmetries

(h) Intra-market rivalry: conduct

(i) Pricing issues: coordinated effects

-Conditions facilitating coordinated effects

(ii) Non-price factors in competition

(iii) Other market-wide horizontal conduct

(g) Vertical agreements

3. Remedial action

Remedies

(a) Consideration of appropriate

remedies

(b) The cost of remedies and

proportionality

(c) Effectiveness of remedies

(d) Types of remedy

(e) Choice of remedy

Customer benefits

(a) Relevant customer benefits

(b) Possible relevant customer

benefits

(c) Relevant customer benefits

Approach for Competition Analysis

Identification of Key Market Economics

Develop competition concerns

Evaluate the hypotheses

STAGE 1 STAGE 2 STAGE 3 STAGE 4

Assessing overall impact

Appendix 3

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Stage 1: Identification of Key Market Economics

Competition Analysis

• What is the „outside market‟? What are the relevant (platform) services/products?

• What is the structure and scale of the relevant services/product markets?

• What is the nature of competition in these markets?

• How do consumers behave in the market?

Objective

Questions

Input

Output

Processes

• To identify competing products and competitor groups (adjacent markets)

• To identify vertical and horizontal relationships within platforms and competitors

• To identify consumer behaviour in the market

• To identify cost structures within the platform market

• Driven by analysis of competing business models under the scenarios identified by the FSA

• Description of outside market

• Description of services/product offerings, business models and market positioning of main competitors

• Description of main market segments

• Description of key issues determining competition conditions

Identification of Key Market Economics

Develop competition concerns

Evaluate the hypotheses

Assessing overall impact

STAGE 1 STAGE 2 STAGE 3 STAGE 4

• Market analysis undertake by Deloitte. Scenario definition (current, post RDR no bans, post RDR with bans)

• FSA consultations

• Market interviews

Stage 1- Identification of Key Market Economics: overview

• The Identification of Key Market Economics stage considers the market‟s existing vertical and horizontal relationships and the assumptions of how markets will behave in a post

RDR world without the bans(„the counterfactual‟) and in a post Bans world.

Appendix 3

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Stage 1: Identification of Key Market Economics

In the Identification of Key Market Economics, market and service/product definition is used

to support the identification of the main competitor groups and market segments

• Administration services

• Distribution channel

Customer Segment

• High / Low income

• Complex/simple needs

• Advised / Non-advised

Revenue models

Ownership

• Vertical integration

• Independent platforms

Firm behaviour and commercial

indicators:

• Charge structure/ and contracts

• Cost structure

• Market strategies

• How many market segments?

• Business models may be largely differentiated by product offering to advisers/consumers given customer focus of individual

advisers

• Different platforms provide offerings for different segments: wide range of funds/wraps

• Current revenue models vary:

• Rebate based

• Fee-based

• Hybrid

• Further analysis of specific firms‟ behaviour assist in assessing overall market competitiveness

• Relationship with providers and advisers of particular importance

• Understanding of the role/magnitude of sunk costs; reputation; scale/volume in current strategies

• Economies of scale and scope under the no ban/post ban scenarios

• Are consumers behaving rationally or behaviourally and might this differ between customer types?

• Ability/incentives for advisers to switch platforms important competitive constraint on platforms

• Sensitivity of customers to charges important competitive constraint. What wider possible impact of regulation?

Customer behaviour :

• Price sensitivity

• Switching

• Demand/supply-side substitutability and platforms‟ services offerings

• Administration services vary in depth/quality and may place non-platforms in a larger separate market

ISSUE FOCUS KEY AREAS FOR ANALYSIS

• Concentration

• New entry

• Quality/innovation

• Pricing and Profitability

Products/services

Consumer behaviour

Business models

Market structure and

competitiveness

Firm behaviour

• Vertical relationships upstream and downstream have important competitive implications

• Barriers to entry are likely to be of particular importance (especially given current focus on building market share)

• Scope of substitutes

• Difference in business models

Adjacent markets /

outside markets

• What are the adjacent markets: are they close competitors?

• Is regulation changing the relative competitive advantage of adjacent markets?

• Will consumers drop out of the investment market altogether?

• In addition, the key issues determining market competitiveness are identified from consideration of firm/consumer behaviours and market structure.

Appendix 3

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Stage 1: Identification of Key Market Economics

The Identification of Key Market Economics also includes the definition of scenarios post

RDR and post implementation of the rebate bans. This is required to define a counterfactual

against which the impact of the bans is assessed

• The competition analysis requires assumptions to be made on how markets

will behave in a post RDR world without the bans („the counterfactual‟).

• It also requires assumptions on how markets will behave in the post RDR

world where the bans to cash rebates and fund rebates are implemented.

• These assumptions need to be specified across business models, and for

each player in the value chain of a business model.

• These assumptions and associated analysis are presented in the Business

Model Analysis, which:

• Defines and models changes in the platforms‟ business models and

on behaviours and incentives as a result of the RDR (“the

counterfactual”).

• Defines and models changes in the platforms' business models and

on behaviours and incentives as a result of the bans to both fund

rebates and cash rebates.

• Impacts are also analysed in relation to whether the bans may increase the

risk of substitution with adjacent markets that are not affected by similar

regulation.

• This analysis provides the basis for identifying which competition impacts

may be due to exclusively to the bans as opposed to those that would occur

as a result of RDR.

Existing practices

Post RDR (no ban), the counterfactual

Impact of RDR on:

• Platform business models

• Players within the platform value chains

• Players outside the platform market (adjacent markets)

• Vertical relationships within the adjacent markets value

chain

Post bans (RDR with fund rebate and cash rebate ban)

Impact of each ban on:

• Platform business models

• Players within the platform value chains

• Players outside the platform market (adjacent markets)

• Vertical relationships within the adjacent markets value

chain

Implications

• Market structure

• Market behaviour

• Consumer outcomes

Appendix 3

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Stage 1: Identification of Key Market Economics

Additional market assumptions are employed in the Competition Analysis

Markets included in the analysis Assumptions

Adjacent

markets

• ISA managers offering products form a single fund provider

• Discretionary fund managers

• Life Insurance providers offering life wrappers

• SIPP providers

• Execution-only brokers that do not offer custodian services

• The fund rebate ban does not apply to any of the adjacent markets

• The cash rebate ban does apply to adjacent markets (when it is an advised

market)

• All adjacent markets will comply with the RDR rule on transparency of

adviser charging (where they constitute advised channels)

Consumers

rationality

In this context, rational consumers are defined as those behaving independently of advisers (i.e. they do request advice but do not always follow it) while

behavioural consumers are defined as those who do exactly as they are told by advisers.

Based on discussions with the FSA, the assumptions of the post RDR and post Bans scenarios include:

• In the advised market, consumers do exactly as they are told by advisers (i.e. are behavioural). However, as explained in the Business Model Analysis

(Section 2), as a result of the RDR consumers become more engaged and sensitive to advisers‟ charges and advisers will need to justify the ir

propositions as well as their recommendations. This increases advisers‟ sensitivity to platforms and funds‟ prices.

• The size of the non advised market may change as a result of the RDR, including because of customer‟s price sensitivity to explicit advisers‟ fees.

With regards to advisers, who act in this context as agents for consumers, behaviours are discussed in more detail in the Business Model Analysis

(Section 2).

Unit rebate and

cash rebate

Unit rebates could be thought of as functionally equivalent to cash rebates. However, the industry has noted certain operational complexities and extra

costs that may arise in managing unit rebates.

As such, it is assumed that a transaction cost is incurred when unit rebates are managed, thus differentiating them from cash rebates.

• The table sets out some additional assumptions that were employed in the Competition Analysis.

• These have been agreed with the FSA before proceeding to the analysis.

Appendix 3

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Stage 2: Develop competition concerns

Stage 2- Develop competition concerns and hypotheses: overview

Competition Analysis

• What are the most important areas of concern for competition/consumer harm that the bans could create?

• What market conditions – the hypotheses - would need to hold so that the concerns would arise?

• Do the bans facilitate/ exacerbate the market conditions (hypotheses) that lead to competition concerns?

Objective

Question

Input

Output

Processes

• To identify key hypotheses for testing and evaluation

• Linking key market economics to competition processes

• Using relevant market drivers to define each hypothesis in more detail

• List of competition concerns that may materialise as a result of the bans

• List of supporting and contradicting hypotheses that are used use to test whether a competition concern is triggered by

the bans

Identification of Key Market Economics

Develop competition concerns

Evaluate the hypotheses

Assessing overall impact

STAGE 1 STAGE 2 STAGE 3 STAGE 4

• Identification of Key Market Economics in Stage 1

• Theories of consumer harm

• Interviews with market players, workshop with FSA, support of Prof. Stephen Davies

• This stage sets out the main elements of the definition of competition concerns and of a set of hypotheses for each concern that would support or contradict the

materialisation of the concern as a result of the bans.

Appendix 3

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Stage 2: Develop competition concerns

The consideration of possible theories of harm gives rise to potential competition concerns and

related hypotheses to be evaluated in the competition analysis

The approach to linking economic theory to market conditions and to the

analysis of the impact of the ban is as follows:

1. Identifying competition issues in the market that may arise as a result

of the ban (“concerns”)

• The review of theories of consumer harm indicates areas where economic

theory identifies possible negative consumer impacts as a result of

competition distortions.

• Based on the market analysis, the theories of harm have been applied to

the platform market and six possible competition “concerns” have been

identified.

• A concern is a substantiation of negative competition impacts and

consumer harm in this specific market.

2. Testing whether competition issues are generated as a result of the

ban

• To check whether the ban does lead to a competition concern, a number of

hypotheses on market behaviour have been developed and tested.

• “Supporting hypotheses” are market conditions that, if true, increase the

probability of a concern materialising as a result of the ban.

• “Contradicting hypotheses” are market conditions that, if true, reduce the

probability of a concern materialising as a result of the ban.

• These hypotheses represent general market behaviours that may or may

not be triggered directly by the ban.

3. Using the results of the market analysis and business modelling to

understand which hypotheses are correct

• For each supporting and contradicting hypothesis, evidence and market

analysis have been reviewed to determine whether the hypotheses

materialise in the post ban scenario.

4. Determining if the concern arising as a result of the bans is justified

• This is done by performing a qualitative analysis of the evidence of the

supporting and contradicting hypotheses.

Theories of harm

• Elimination of competition

• Abuse of dominance

• Tacit collusion / coordinated effects

• Quality reduction

“Concerns”

Competition issues that may arise in the market as a result

of the ban

“Hypotheses”

Market conditions that would need to hold so that the

concerns would/would not arise

Identification of

Key Market

Economics

“Supporting hypotheses”

If true, increase the probability of a concern materialising

as a result of the ban

“Contradicting hypotheses”

If true, reduce the probability of a concern materialising as

a result of the ban

Appendix 3

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Stage 2: Develop competition concerns

Six potential competition concerns are suggested by the review of the theories of harm

Identification of Key

Market Economics Theories of Harm

Elimination of competition

1. Foreclosure

2. Raising rivals‟ costs

3. Lowering rivals‟ benefit

4. Leveraging market power

5. Protecting market power

6. Deterring entry

7. Denying network effects or scale to a rival

Consider potential competition/consumer impacts

given Key Market Economics Identify specific areas of concern

Foreclosure of access to platforms for funds

Consumer choice of investment opportunities is

limited

Distortion of competition by raising fees for

customers

Distortion of competition by reducing revenue /

raising costs for platforms relative to adjacent

markets

Barriers to entry lead to limitations to platform

/horizontal competition resulting in pricing abuses

Specification of competition/consumer

concern

Tacit collusion / coordinated effects

Abuse of dominance

Quality reduction

• Reduction of quality of service

• Reduction of choice

• Increase of pricing complexity / Decrease in

pricing transparency

Apply concern to

each player

Impacts on:

Consumers

Advisers

Platforms

Funds

Adjacent players

Quality of service to advisers and consumers is

adversely affected

Advisers‟ platform

selection criteria

Stakeholders‟ behaviour

Market costs and

business models

Market entry

Price setting practices

Adjacent markets /

outside market

Appendix 3

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Th

eorie

s o

f harm

194

Stage 2: Develop competition concerns

The six potential competition concerns that have been identified cover a wide range of

possible market outcomes

# Competition concern Description of competition concerns

1 Foreclosure of access to platforms

for funds

• As a result of the bans, platforms face reduced incentives to host less profitable funds (with low volumes) on their system.

• The bans reduce platforms‟ profitability because customer fees do not fully replace fund rebates and so also lead to a reduct ion in the

number of platforms for funds to be placed on.

• Less profitable platforms are not able to survive due to financial pressure and have to exit the market.

• Vertically integrated platforms apply foreclosure of third party funds to reduce competition between funds and favour their own funds.

2 Distortion of competition by

reducing revenue / raising costs for

platforms relative to adjacent

markets

• Following the bans, platforms‟ profitability decreases due to the removal of fund rebates.

• Removal of cash rebates also acts to reduce attractiveness to advisers, who can still benefit from rebates using by moving to adjacent

markets.

• The bans applied to platforms have the effect of reducing the competitiveness of platforms compared to alternative distribution channels.

3 Barriers to entry lead to limitations

to platform /horizontal competition

resulting in price distortions

• Advisers continue to use a small number of platforms.

• Following the bans, platforms‟ revenues decrease in the short term.

• The bans make fees more transparent and collusion on pricing practices (charge types and levels) becomes easier.

• Platforms seek to retain investors by increasing switching costs and barriers (beyond re-registration fees) or by locking consumers in.

• Platforms have scope to increase fees in the long term, and limitations to competition in platforms may also lead to increases in funds‟ prices.

4 Distortion of competition by raising

fees for customers

• Following the bans, advisers behave as agent of their clients and, other things equal, select the cheapest platform.

• However, unit rebates are not widely used because of operational difficulties and transaction costs.

• This leads those platforms that are willing to pass on discounts to consumers to negotiate different share classes with fund managers.

• This, in turn, increases switching costs and reduces the extent to which price competition takes place in the market resulting in higher prices

for consumers in the long term. This may also lead to increases in funds‟ prices.

5 Consumer /adviser choice of

investment opportunities is limited

• The bans trigger a reduction in number of platforms, which may reduce scope for investment opportunities.

• It also changes the relative benefit for a platform to host a number of less profitable funds, and platforms could drop funds from their offering.

• Choice of investment opportunities could be reduced.

6 Quality of service to advisers and

consumers is adversely affected

• Following the bans, platforms‟ profitability is reduced due to the removal of fund rebates.

• This increases barriers to entry and leads to concentration among platform providers.

• In a more concentrated market, platforms reduce administration and other services to advisers for the same price.

• This requires additional workload for advisers, who charge consumers for the added effort.

• While the focus of the analysis is on six potential concerns, this provides the basis for presenting conclusions on the Competition Analysis in terms of the overall impacts of the bans on

market structure, market behaviours and consumer outcomes.

Elim

inatio

n o

f com

petitio

n

Ta

cit c

ollu

sio

n

Abuse o

f

dom

inance

Qualit

y r

eductio

n

Appendix 3

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Stage 2: Develop competition concerns

Elimination of competition: Concern 1

Concern: Foreclosure of access to platforms for funds

Why is the hypothesis supporting or contradicting the concern?

Supporting

Hypotheses

• Platforms exhibit economies of scale and reputational advantages

that will lead to concentration in platform provision

• Platforms maximise returns by limiting the number of funds on a

platform (e.g. by minimising cost of adding/managing unprofitable

funds or by shifting demand to preferred funds)

• Advisers have tendency to focus purchases on a limited number of

platforms

• Economies of scale may make it easier for large providers to sustain the costs of

implementing the bans, while smaller platforms may suffer more and eventually

may be forced to leave the market

• Platforms gain by reducing the number of marginal funds (i.e. funds that are less

profitable at the margins)

• Reduction in number of funds does not affect attractiveness of platform as advisers

have little appetite to switch platform

Contradicting

Hypotheses

• Advisers will focus clients‟ business on platforms offering widest

scope of funds

• Low switching costs for advisers

• Low barriers to entry will allow any excluded funds to vertically

integrate into platforms

• Legacy assets are churned and this supports funds / providers

investing in platforms

• Platforms have limited incentives to reduce funds as to do so would risk losing

business

• By reducing funds / preventing funds access, platforms risk losing investment more

easily if switching costs are low

• Funds can find other ways to the market, reducing platforms incentives to foreclose

them

• Increase in service demand prompt funds to enter the market

• For each competition concerns, supporting and contradicting hypotheses are identified

Appendix 3

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Stage 2: Develop competition concerns

Elimination of competition: Concern 2

Concern: Distortion of competition by reducing revenue/raising costs for

platforms relative to adjacent markets

Why is the hypothesis supporting or contradicting the concern?

Supporting

Hypotheses

• Regulation imposes costs on platforms only

• Regulation affects platform‟s revenue levels

• Advisers/consumers are sensitive to platform fees and respond to

fees increases by leaving the platform market

• Differentiation in consumer investment opportunities between

platforms and adjacent markets is minimal

• Platforms lose buyer power advantages vs funds (fund rebates)

and as a result negotiate worse pricing outcomes for consumers

• Bans do not create extra costs for adjacent markets, while platforms

have to incur additional expenses to comply with regulation

• Bans do not affect revenues for adjacent markets, while regulation

changes revenues for platforms

• Platforms lose customers to adjacent markets more easily

• No/little perceived difference in services leads advisers to switch to

adjacent markets

• Platform prices become less attractive than a similar product in an

adjacent market

Contradicting

Hypotheses

• Costs imposed by the bans are sustainable/not material for

platforms

• Impact of cash/fund rebates in adjacent markets is limited

• Platform service advantage is not replicable by adjacent markets

• Platforms can absorb the financial impact of the ban with minimal price

adjustments

• Currently, adjacent markets do not employ/ benefit from fund rebates,

and as such the fund rebate ban on platform levels the playing field

• Adjacent markets are not substitutes for platforms and regulation in the

platform market does not shift investment to adjacent markets

• For each competition concerns, supporting and contradicting hypotheses are identified

Appendix 3

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Stage 2: Develop competition concerns

Abuse of dominance: Concern 3

Concern: Distortion of competition by raising fees for customers

Why is the hypothesis supporting or contradicting the concern?

Supporting

Hypotheses

• Bans lead to a reduction in number of platforms

• Rebate and cash bans have the effect of making fees more

transparent

• Platform services are sufficiently differentiated from adjacent

markets such that price increases are sustainable

• Switching costs for advisers are very high, resulting in advisers

being locked in with platforms

• Advisers are not sensitive to fees on customer behalf and are not

sensitive to unit rebates

• Price increases are followed by adjacent markets

• Higher opportunities for price increases

• Higher opportunities for price collusion

• Price increases are sustainable as advisers will not shift

investment to adjacent markets

• Price increases are sustainable as advisers will prefer to stay

invested on their current platform

• Advisors do not apply price pressure on platforms and funds‟

charges

• Price increases are sustainable as advisers will not shift

investment to adjacent markets

Contradicting

Hypotheses

• Bans do not impact market entry

• Pricing pressure from advisers is sufficient to constrain prices

upstream

• Price transparency increases price competition

• Competition from adjacent markets leads to substitution away from

platforms

• Unit rebates are functionally perfect substitutes for cash rebates,

leading to no impact on fund charges

• Competition in the platform market is not affected

• Fee raises are not sustainable

• Prices become more visible and advisers can compare prices

more easily, making price increases unsustainable

• Platforms have limited incentives to increase prices as they fear

losing business to adjacent markets

• Platforms would not resort to increasing fees as a result of the ban

• For each competition concerns, supporting and contradicting hypotheses are identified

Appendix 3

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Stage 2: Develop competition concerns

Tacit collusion / coordinated effects: Concern 4

Concern: Barriers to entry lead to limitations to platform /horizontal

competition resulting in pricing abuses

Why is the hypothesis supporting or contradicting the concern?

Supporting

Hypotheses

• Platforms exhibit economies of scale and reputational

advantages that will lead to concentration in platform provision

• Rebate and cash bans have the effect of making pricing more

transparent

• High entry barriers in the platform market

• Platform service is differentiated enough from adjacent markets

(e.g. Administration services) that price distortion is sustainable

• Switching costs for advisers are high

• Economies of scale favour large providers, who could sustain the

negative impact of the ban

• Higher opportunities for price collusion

• Competition is limited and platforms can sustain price increases more

easily

• This limits competition from adjacent markets

• Price increases are sustainable as advisers will prefer to stay invested

in their current platforms

Contradicting

Hypotheses

• Entry costs, including for fund managers and manufacturers, are

low

• Platforms‟ set up costs are not impacted by the bans

• Price transparency increases price competition

• Advisers / consumers value platform reputation less in a post

Bans world

• Unit rebates are functionally perfect substitutes for cash rebates,

leading to no impact on fund charges

• Low barriers to entry deter price increases

• This contributes to reduce barriers to entry

• Prices become more visible and advisers can compare prices more

easily, making price increases unsustainable

• Switching is easier and price increases may not be sustainable

• Limited impact on platforms‟ profitability does not increase barriers to

entry

• For each competition concerns, supporting and contradicting hypotheses are identified

Appendix 3

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Stage 2: Develop competition concerns

Quality reduction: Concern 5

Concern: Consumer choice of investment opportunities is limited

Why is the hypothesis supporting or contradicting the concern?

Supporting

Hypotheses

• Bans lead to lower number of platforms for advisers to choose

from

• Further entry in the market is halted

• Bans lead to lower number of funds and fund types on platforms

• Bans reduce platforms‟ independence

• Variety offered by a higher number of platforms may decrease

• This reduces choice for platforms

• This reduces choice of funds and fund types

• Vertically integrated platforms have higher incentives to give

preferential treatments to own funds and exclude other funds

Contradicting

Hypotheses

• Number of platforms is not affected by the bans

• Advisers continue to value fund variety

• Adjacent markets provide similar levels of choice to platform

markets at similar prices

• Current number of platforms and funds on platform is redundant

• Existing consumer choice is distorted as it is driven by perverse

incentive mechanisms of cash rebates

• Existing rebate mechanisms in adjacent markets deliver similar

benefits to consumers

• Choice of platforms in the market is not reduced

• Platforms will require to show fund variety to remain competitive

• Choice in the wider market is not reduced

• Advisers face too much choice and a reduction of funds is not

detrimental

• The ban corrects the distorted incentives

• Customers can turn to adjacent markets for rebates similar to existing

platform rebates

• For each competition concerns, supporting and contradicting hypotheses are identified

Appendix 3

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Stage 2: Develop competition concerns

Quality reduction: Concern 6

Concern: Quality of service to advisers and consumers is adversely affected

Why is the hypothesis supporting or contradicting the concern?

Supporting

Hypotheses

• Bans lead to lower number of platforms for advisers to choose from

• Further entry in the market is halted

• Bans reduce platforms‟ independence

• High switching costs for advisers

• Lower competition may reduce service quality

• Lower competition may reduce service quality

• Vertically integrated platforms have higher incentives to give

preferential treatments to own funds and excluding other funds

• Advisers are “locked in” and quality decreases may be sustained

more easily

Contradicting

Hypotheses

• Advisers value platforms‟ service quality

• Adjacent markets provide similar levels of choice to platform

markets at similar prices

• Market is oversupplied with platforms and funds on platforms

• Low switching costs for advisers

• Adjacent markets provide competing services

• Platform will need to retain quality of service if they want to remain

competitive

• Platforms have limited incentives to reduce quality as they fear

losing business to adjacent markets

• Advisers face too much choice and a reduction of funds is not

detrimental

• Platforms have limited incentives to reduce quality as they fear

losing advisers to competitors or adjacent markets

• Platforms have limited incentives to reduce quality as they fear

losing business to adjacent markets

• For each competition concerns, supporting and contradicting hypotheses are identified

Appendix 3

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Stage 3: Evaluate the hypothesis

Stage 3- Evaluate the hypotheses

Competition Analysis

To what extent and how is the substantiation of a hypothesis impacted by the two scenarios?

Objective

Question

Input

Output

Processes

To assess whether possible competition concerns are likely to arise as a result of the ban or whether the bans will lead to

benefits for competition and consumers

Combination of analysis of incentives and commercial drivers for each business model in each market segment

Variations in relevant indicators to inform the detriment/efficiency analysis

Identification of Key Market Economics

Develop competition concerns

Evaluate the hypotheses Assessing overall impact

STAGE 1 STAGE 2 STAGE 3 STAGE 4

Market analysis

Business modelling analysis: revenue structure, cost structures, entry costs, scale and scope economies

Interviews

Support from Prof. Stephen Davies

• This stage evaluates supporting and contradicting hypotheses for each concern by reviewing the implications of the Market Background, Post RDR and Post Bans

Behaviour and Business Model Analysis

Appendix 3

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Stage 3: Evaluate the hypothesis

Key market issues and market behaviours are used for the hypothesis evaluation (i)

• The review of the current market and the Business Model analysis, combined with the identification of the concerns‟ supporting and contradicting hypotheses, has

led to the identification of a set of key market issues that are central for the competition analysis.

• These key market issues reflect the analysis of the market under a post RDR (counterfactual) and a post Bans scenario. They are also based on data obtained

from market research, data requests submitted by the FSA to operators and by the business model.

• Having undertaken this review, it appeared that some hypotheses were no longer relevant for the analysis and have not been discussed further.

• In summary, the assessment of the competition concerns has relied on two outputs:

• The identification of a set of key market issues that summarise the market and business modelling analysis in a structure that supports the competition

analysis. These are shown in the table below.

• The identification of how behaviours change for funds, platforms, consumers and advisers post RDR and post bans. These key areas of relevance for

these concerns are summarised in the next page, while the Business Model Analysis (Section 2) discusses these in more detail.

• The specific information used to test and evaluate the concerns‟ hypotheses is then showed for each concern.

1. Key market issues for competition analysis

# Issue Objective for both post RDR and post ban scenarios

1 Advisers: platform selection criteria

and drivers

• Understanding how RDR and bans change platform selection criteria for advisers

2 Platform market pricing structure and

levels

• Understanding possible outcomes on pricing of changes (structure, transparency and level) along the platform

value chain

3 Platform market costs • Understanding impact of scale economies, fixed start up costs and key cost categories for platforms

• Understanding magnitude of certain costs that will be incurred as a result of the bans

4 Entry in platform market • Understanding whether RDR and the bans change market entry dynamics

• Understanding whether RDR and the bans impact on the platform market structure

5 Adjacent markets • Understanding relative substitution (demand and supply) of the platform market with adjacent markets

Appendix 3

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Stage 3: Evaluate the hypothesis

Key market issues and market behaviours are used for the hypothesis evaluation (ii)

Party Behaviours considered

Platform

profitability,

costs and

buyer power

• Which key profitability drivers are impacted by the bans, and how?

• Should consolidation be assumed as a result of the bans and why?

• Do barriers to entry vary as a result of the bans?

• How will platforms change their charging structure as a result of the bans? (# of share

classes, unit discounts etc...)

• What changes in charge levels can be expected?

• What changes for platforms in terms of services offered (account management, other

admin) as a result of the bans?

• What changes do the bans have on current inter and intra platform switching costs?

Through which tools (e.g. Share classes)

• How do these drivers of platforms‟ power vs funds vary as a result of the bans:

Distribution network; Fund rebates

• How do these drivers of platforms‟ power vs advisers vary as a result of the bans:

Number of funds; Variety of funds

Advisers‟

drivers/

behaviours

• How do advisers‟ drivers change as a result of RDR and the bans?

• Will platform reputation and administrative services provided by the platform still matter?

• Or will platform fees to advisers become the main driver in platform selection?

• Will advisers be sensitive to fees on customer behalf?

• Will advisers respond to unit rebates for customers?

• Will consumer sensitivity to fees increase/decrease as a result of the bans?

Adjacent

markets

• What are the key differences in services and prices that currently exist between platforms

and adjacent markets?

• How will these differentiators vary after the RDR?

• How will these vary in a post Bans scenario?

• Extent to which advisers shift to adjacent markets in response to the bans

• Extent to which funds would shift to adjacent markets in response to the bans

• To what extent will some consumers shift to a non-advised market?

Funds‟

behaviours

• How will funds change their charging structure as a result of the bans?

• Will funds seek other ways to reach the market as a result of the bans?

• The analysis reported in the Business Model Analysis

(Section 2) defines and models changes in the platforms‟

business models and on behaviours and incentives as a

result of the ban to both fund rebates and cash rebates.

• The key questions answered are reported in the table on

the left.

• Central to the analysis are four areas that are determined

by the flows of the transactions between the market

participants:

• Platforms: understanding effects of the ban on scale

economies and cost structures, concentration and

vertical integration, changes in buyers power upstream

and downstream

• Advisers: what will become the key driver for them after

the ban? Will they be sensitive to price and rebates on

behalf of customers?

• Adjacent markets: how attractive will these become in

practice for advisers after the ban?

• Funds: will the ban lead to changes in behaviours and in

their relationship with platforms and adjacent markets?

• The specific information used to test and evaluate the

concerns‟ hypotheses is shown in the following pages.

2. Behaviours

Appendix 3

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Stage 3: Evaluate the hypothesis

Elimination of competition: Concern 1

Concern: Foreclosure of access to platforms for funds Information used to evaluate the hypothesis

Supporting

Hypotheses

• Platforms exhibit economies of scale and reputational advantages that will

lead to concentration in platform provision

• Platforms maximise returns by limiting the number of funds on a platform

(e.g. by minimising cost of adding/managing unprofitable funds or by shifting

demand to preferred funds)

• Advisers have tendency to focus purchases on a limited number of platforms

• Platforms‟ costs

• Platforms‟ business models

• Cost of adding/removing funds

• Average number of platforms used by advisers

Contradicting

Hypotheses

• Advisers will focus clients‟ business on platforms offering widest scope of

funds

• Low switching costs for advisers

• Low barriers to entry will allow any excluded funds to vertically integrate into

platforms

• Legacy assets are churned and this supports funds / providers investing in

platforms

• Advisers‟ drivers

• Switching costs

• Barriers to entry

• Sunk costs to create a platform

• Funds‟ behaviours

Appendix 3

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Stage 3: Evaluate the hypothesis

Elimination of competition: Concern 2

Concern: Distortion of competition by reducing revenue/raising costs for platforms

relative to adjacent markets

Information used to evaluate the hypothesis

Supporting

Hypotheses

• Regulation imposes costs on platforms only

• Regulation affects platform‟s revenue levels

• Advisers/consumers are sensitive to platform fees and respond to fees

increases by leaving the platform market

• Differentiation in consumer investment opportunities between platforms and

adjacent markets is minimal

• Platforms lose buyer power advantages vs funds (fund rebates) and as a

result negotiate worse pricing outcomes for consumers

• Platforms‟ costs

• Platforms‟ business model, price levels post bans

• Consumers and advisers‟ drivers

• Adjacent markets / Demand side substitution

• Platforms‟ business model

Contradicting

Hypotheses

• Costs imposed by the bans are sustainable/not material for platforms

• Impact of cash/fund rebates in adjacent markets is limited

• Platform service advantage is not replicable by adjacent markets

• Profitability analysis and cost structures

• Adjacent markets business models analysis

• Adjacent markets / Demand side substitution

Appendix 3

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Stage 3: Evaluate the hypothesis

Abuse of dominance: Concern 3

Concern: Distortion of competition by raising fees for customers

Information used to evaluate the hypothesis

Supporting

Hypotheses

• Bans lead to a reduction in number of platforms

• Rebate and cash bans have the effect of making fees more

transparent

• Platform services are sufficiently differentiated from adjacent

markets such that price increases are sustainable

• Switching costs for advisers are very high, resulting in advisers

being locked in with platforms

• Advisers are not sensitive to fees on customer behalf and are not

sensitive to unit rebates

• Price increases are followed by adjacent markets

• Platform drivers: Concentration analysis

• Price structure and price levels post bans

• Adjacent markets / Demand side substitution – service

differentiation

• Platform drivers: switching costs

• Advisers‟ drivers

• Adjacent markets / Demand side substitution

Contradicting

Hypotheses

• Bans do not impact market entry

• Pricing pressure from advisers is sufficient to constrain prices

upstream

• Price transparency increases price competition

• Competition from adjacent markets leads to substitution away from

platforms

• Unit rebates are functionally perfect substitutes for cash rebates,

leading to no impact on fund charges

• Market entry analysis

• Advisers‟ drivers

• Price structure and price levels post bans

• Adjacent markets / Demand side substitution

• Price structure and price levels post bans, platform costs

Appendix 3

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Stage 3: Evaluate the hypothesis

Tacit collusion / coordinated effects: Concern 4

Concern: Barriers to entry lead to limitations to platform /horizontal competition

resulting in pricing abuses

Information used to evaluate the hypothesis

Supporting

Hypotheses

• Platforms exhibit economies of scale and reputational advantages that

will lead to concentration in platform provision

• Rebate and cash bans have the effect of making pricing more

transparent

• High entry barriers in the platform market

• Platform service is differentiated enough from adjacent markets (e.g.

Admin services) that price distortion is sustainable

• Switching costs for advisers and funds are high

• Platforms‟ costs

• Price structure and price levels post bans

• Barriers to entry, expansion and exit

• Supply side substitution

• Adjacent markets / Demand side substitution– service

differentiation

• Switching costs

Contradicting

Hypotheses

• Entry costs, including for fund managers and manufacturers, are low

• Platforms‟ set up costs are not impacted by the bans

• Price transparency increases price competition

• Advisers / consumers value platform reputation less in a post Bans

world

• Unit rebates are functionally perfect substitutes for cash rebates,

leading to no impact on fund charges

• Barriers to entry

• Scale economies for platforms: how do platforms‟ costs vary with

volume of AUA

• Price structure and price levels post bans

• Advisers‟ drivers

• Price structure and price levels post bans, platform costs

Appendix 3

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Stage 3: Evaluate the hypothesis

Quality reduction: Concern 5

Concern: Consumer choice of investment opportunities is limited

Information used to evaluate the hypothesis

Supporting

Hypotheses

• Bans lead to lower number of platforms for advisers to choose

from

• Further entry in the market is halted

• Bans lead to lower number of funds and fund types on platforms

• Bans reduce platforms‟ independence

• Platform market cost structures and entry

• Market entry / Barriers to entry

• Quality / choice

• Vertical integration

Contradicting

Hypotheses

• Number of platforms is not affected by the bans

• Advisers continue to value fund variety

• Adjacent markets provide similar levels of choice to platform

markets at similar prices

• Current number of platforms and funds on platform is redundant

• Existing consumer choice is distorted as it is driven by perverse

incentive mechanisms of cash rebates

• Existing rebate mechanisms in adjacent markets deliver similar

benefits to consumers

• Market entry / Barriers to entry

• Advisers‟ drivers

• Adjacent markets / Demand side substitution

• Existing quality / choice

• Evidence on consumer distortion

• Adjacent markets / Demand side substitution

Appendix 3

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Stage 3: Evaluate the hypothesis

Quality reduction: Concern 6

Concern Quality of service to advisers and consumers is adversely affected

Information used to evaluate the hypothesis

Supporting

Hypotheses

• Bans lead to lower number of platforms for advisers to choose from

• Further entry in the market is halted

• Bans reduce platforms‟ independence

• High switching costs for advisers

• Platform market cost structures and entry

• Market entry / Barriers to entry

• Vertical integration

• Switching costs

Contradicting

Hypotheses

• Advisers value platforms‟ service quality

• Adjacent markets provide similar levels of choice to platform

markets at similar prices

• Market is oversupplied with platforms and funds on platforms

• Low switching costs for advisers

• Adjacent markets provide competing services

• Advisers‟ drivers

• Adjacent markets / Demand side substitution

• Existing quality / choice

• Switching costs

• Adjacent markets / Demand side substitution

Appendix 3

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Stage 4: Assessing overall impact

Stage 4- Assessing overall impact

Competition Analysis

Given the evaluation of the hypotheses related to each competition/consumer concern, what is the likely overall balance

of impacts?

For each concern, how are the market participants impacted by the ban?

Overall, what does the analysis of post Bans impacts suggest for consumers outcomes, competition outcome and

market outcomes?

Objective

Question

Input

Output

Processes

For each competition concern, describe and compare impacts of moving to the post Ban scenario based on whether the

evidence of supporting and contradicting hypotheses can be supported by the information collected

Based on the concern impacts, identify high level implications for consumers, competition and the market

Assessment of the quality of evidence and analysis supporting the hypotheses evaluation

Assessment of the relative importance of the impacts

Assessment of overall impacts for consumers, competition and the market

Overall weighing of impacts for each competition/consumer concern

Analysis of overall impacts for consumers, competition and the market

Identification of Key Market Economics

Develop competition concerns

Evaluate the hypotheses

Assessing overall impact

STAGE 1 STAGE 2 STAGE 3 STAGE 4

Hypothesis evaluation

• This stage assesses the overall impacts of the bans on the concerns identified, and presents the results in terms of impacts of the bans on market structure,

market behaviours and consumer outcomes

Appendix 3

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Stage 4: Assessing overall impact

Assessing impact for each concern and on market structure, behaviours and outcomes

• For each concern, the analysis of the information associated with the

contradicting and supporting hypotheses leads to a qualitative assessment

of the factors that may contribute to increase the concern as a result of the

ban.

• The assessment is performed across the value chain to ensure that the post

ban competition risks are evaluated in the whole.

• This leads to an overall assessment of whether possible competition

concerns are likely to arise as a result of the ban or whether the bans will

lead to benefits for competition and consumers.

• Finally, the key findings of analysis of the concerns are presented in terms

of conclusions on the impact of the bans on market structure (entry,

horizontal competition, vertical integration), on the behaviours of the market

players (costs, price setting practices, buyer power across the value chain)

and competition and consumer outcomes (investment choice, service

quality, prices).

Concern

Evaluation of supporting and contradicting hypotheses and

of evidence / indicators

Application of assessment to market participants

Overall assessment by concern

Consumers

Advisers Platforms

Funds Adjacent players

Conclusion on overall impact of the bans on:

Market structure

Market behaviours

Competition/consumer outcomes

Appendix 3

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