When too much success risks the ire of regulators

Hargreaves Lansdown Plc is on a roll. The UK’s biggest direct-to-consumer fund platform saw the assets it manages grow by 3 percent to $120 billion in the four months through April as it added 60,000 new clients. The firm’s market value is near a record 9 billion pounds. That picture of health, though, may prove a red rag to the regulatory bull.
Last year, the Financial Conduct Authority said it was investigating “whether platforms help investors make good investment decisions and whether their investment solutions offer value for money.” It said it will publish its preliminary conclusions this summer.
The move follows the FCA’s two-year investigation into the broader fund management industry, during which it highlighted that asset managers had “consistently earned substantial profits” in recent years. Its April conclusions included restrictions on the use of benchmarks to promote funds and increased transparency about fees.
The regulatory shadow looming over the online fund supermarket industry helps explain why of the 16 firms covering Hargreaves Lansdown, only analysts at Barclays Plc rate the stock a buy. Seven advise investors to sell and eight to hold, according to Bloomberg.
UK platforms added more than 100 billion pounds of assets last year, with total assets climbing to almost 600 billion pounds. The top four firms used directly by retail investors — Hargreaves Landsdown, Barclays Stockbrokers, TD Direct Investing and Fidelity Personal Investing — control more than 100 billion pounds of the 170 billion pounds in that market segment.
Moreover, research firm Platforum reckons the top four platforms used by financial advisors on behalf of their clients — Aegon/Cofunds, Funds Network, Standard Life and Old Mutual — control about 44% of the so-called intermediated market, which is worth 422 billion pounds. Economies of scale for the biggest players mean their market share may rise to as much as 75% by 2022, Platforum estimates.
It’s hard to see how the FCA could give the platform industry a clean bill of health, given its starting point is whether barriers to entry are inhibiting competition. But quite what it can do about that — apart from kicking the can down the road by referring the issue to the Competition and Markets Authority — remains a known unknown for the fund platforms.

—Bloomberg