This blog sets out the key regulatory issues and potential areas of reform on which we think the FCA is likely to focus in its forthcoming review of platforms’ best buy lists. In particular, we consider how this exercise is likely to interface with the FCA’s wider supervisory priorities in the areas of fund liquidity, operational resilience, conflicts of interest, and value for money.
To date the FCA has taken the view that best buy lists have an important role to play in guiding consumers’ investment choices. An FCA Occasional Paper from 2017 noted that funds featured on the lists of 3 of the UK’s biggest platforms returned a ‘statistically significant’ 0.94% more per annum than those that were not on the lists. However, in the light of recent fund suspensions, the regulatory spotlight has fallen once again on best buy lists’ construction, impartiality, and potential conflicts of interest. In particular, FCA CEO Andrew Bailey has said that the FCA will “look again” at best buy lists. Meanwhile, an FCA Dear CEO letter addressed to platforms in February 2020, emphasised, inter alia, the importance of ensuring that conflicts of interests inherent in best buy lists are identified and managed appropriately, and that the lists themselves are constructed impartially.
The regulatory position of best buy lists is complex. Best buy lists do not meet the regulatory definition of financial advice as they do not provide consumers with a personal recommendation. Notwithstanding, retail investors, confronted with a wide choice of funds and often having a limited understanding of investments and their suitability to their personal situation, are likely to place considerable practical reliance on the lists. 
What is a ‘best buy’ in a fund investment context?
The FCA’s focus is likely to fall on whether there is ambiguity, and hence the potential for consumer misunderstanding and harm, on what ‘best buy’ means in the context of such lists. A layman’s interpretation of ‘best’ is likely to be something that is of superior quality to its counterparts and retail investors may well have this understanding in mind when they consider a platform’s best buy list. However, while there is a reasonable assumption that a fund is on a best buy list because it is considered superior overall to other comparable funds, the FCA will nonetheless want to ensure that there is sufficient clarity and transparency for consumers as to:
- how funds are selected for these lists;
- what specific criteria have been used; and
what weight has been applied to individual criterion within each choice. (For example, is a fund considered best because of its performance prospects or investment management costs or both; and, if the latter, what weighting has been applied between these and any other any factors.)
We observe that in practice best buy lists adopt various approaches in the level of detail they provide on the research and selection process and in explaining the funds selection. Some confine themselves to listing the best buy criteria used, whilst others detail, to varying extents, their research process and the specific questions that they pose to fund managers.
From our observation, only a few platforms have, to date, made clear how they take into account liquidity and operational risk whilst selecting funds for their lists. Liquidity risk and operational resilience are increasingly high priorities for the FCA, given their potential to create widespread consumer harm and market impact. Accordingly, we think that, in addition to the traditional key measures of cost and performance, the FCA is likely to focus increasingly on how liquidity and operational risk, and also ESG considerations – another area of rising priority for the FCA - are factored into the overall best buy decision.
The FCA may also consider whether there is a need for greater clarity as to how often lists are updated and specific examples of the types of events that lead to funds being removed from lists and over what timetable. They may also consider how removal of funds should be reflected in any aggregate performance analysis and presentation of the best buy list.
There’s no discounting conflicts …
The overall context here is the FCA’s wider drive on suitability and value for money and increasingly proactive use of the SMCR to support these objectives. Additionally, conflicts of interest are a high priority in the FCA’s 2019/20 business plan.
Against this background, a specific FCA concern is whether funds that offer discounts to certain platforms are more likely to feature on best buy lists. The Dear CEO letter explicitly states that funds being preferred for discounts over “formal and objective criteria” would present a conflict which needs to be managed. The letter also emphasises that, with the SMCR now extended to solo-regulated firms including platforms, platforms must ensure that their senior management have an understanding of all of the issues set out in the letter; conflicts of interest feature prominently amongst these.
Given this context, we think it likely that the FCA will require that, where platforms secure discounts from funds on their best buy lists, they should make clear in plain language on their websites to what extent the discounting process influenced the overall choice of funds. Given the approach being adopted in other sectors, the FCA may accompany this with some form of SMCR accountability for appropriately managing any conflicts within best buy lists.
More generally, from a conflicts of interest perspective, we think that the FCA will want to ensure that platforms are not giving undue marketing prominence and publicity to funds on the best buy list.
Where platforms provide own-name funds of funds, the FCA spotlight is likely to fall on whether there is robust segregation between the funds of funds research team and the best buy lists team, to prevent their influencing each other inappropriately. As an example, when a certain fund is divested from an own-name fund of funds, the FCA will want to see appropriate governance brought to bear on whether this should influence its position on the best buy list.
Interfacing with value assessments and sustainability
Asset managers are required to publish their first assessments of the value that their authorised funds deliver to investors in 2020. A significant number have already been published. This leaves platforms with the option of incorporating these assessments into their best buy lists criteria; if they choose to do so, they will need to decide how much weight to place upon them within the overall fund selection.
At a minimum, the FCA is likely to expect platforms to re-assess funds already on their best buy list whose value assessment suggests that they may be providing poor or below average value. But we also think it likely that the FCA will expect, and may indeed require, platforms to set out a clear explanation of the extent to which fund managers’ own value assessments were factored into the best buy process.
In a similar vein, the EU Disclosure Regulation (expected H1 2021) will require fund managers to disclose how they have accounted for ESG factors in their investment process. Platforms will therefore need to decide to what extent these factors should be taken into account in compiling their best buy lists. Incorporating ESG factors could create challenging operational decisions such as how to treat funds that have a good performance history and fund manager reputation, but lag behind in terms of sustainability. Furthermore, with investors becoming more socially aware, there may be increasing reputational risks for platforms that feature low-sustainability funds on their best buy lists.
To address these issues, platforms will need to distinguish clearly the different reasons for funds being on the list. Potentially they may need to create separate lists in order to capture the differing investment and sustainability preferences of their overall consumer base.
Implications for firms
Best buy lists clearly hold out important benefits for consumers in promoting consumer understanding and assisting high impact personal investment decisions, in a market where advice is not always obtainable at economic cost. Though likely to remain mindful of these benefits, we anticipate that the FCA will expect greater transparency as to the process of constructing and maintaining best buy lists and to the management of any conflicts arising in doing so. Given precedents set elsewhere, we also think it possible that the FCA will bring the SMCR more overtly to bear. This indicates the importance of platforms maintaining, and being able to demonstrate, both effective conflicts identification and management frameworks, and adequate board engagement with and robust governance oversight over compilation of lists. More generally, the continuing utility of the lists will depend in large part on:
a) whether they can meet rising regulatory expectations as to the clarity of explanation on what ‘best’ represents and which criteria have driven this conclusion; and
b) how the lists demonstrably incorporate and complement parallel high priority FCA programmes on value for money and sustainability.
 Survey evidence quoted by the FT found that 25% of those surveyed relied on best buy lists and 45% used them as a secondary sense check