Back at the start of December 2019, the Bank of England, Prudential Regulation Authority and Financial Conduct Authority published a collaborative consultation paper proposing new requirements to strengthen operational resilience in financial services firms.
At the time, the FCA’s chief executive, Andrew Bailey, said of the consultation: “It is in the public interest that a resilient financial system is able to supply the most important services with minimal interruption even during severe operational events. The proposed new requirements are aimed at achieving this outcome.”
Although this paper, along with the Dear CEO letter issued to platforms in early February, came largely in response to struggles numerous platforms faced undertaking replatforming exercises and technology migrations, the sternest test to firms’ operational resilience for many years was just around the corner.
Few platforms, advice firms, or product providers will have been left unscathed by the knock-on effects of the Covid-19 pandemic. Even those least affected have suffered some degree of interruption to normal business practices. Everyone’s ability to maintain client service levels has been well and truly stress-tested. So what do platform flows during the middle two quarters of this year tell us about the impact?
At first glance, the numbers look worrying. But dig a little deeper and the data shows the kind of operational resilience the regulators are calling for.
As the pandemic took hold, flows headed south. No real surprise there.
It’s natural for investors to get the jitters when economies and markets are uncertain. Businesses large and small have been forced into survival mode as they try to keep their heads above water until things recover to some level of normality.
Because of this, during Q2, advised platform market net flows dropped 18.62% from the previous quarter, with gross inflows falling 25.55% over the same period. Flows over the following three months, however, make for better reading. The situation stabilised during Q3 with gross flows falling a fraction at 1.37% from Q2, while net flows rose 2.8%.
Closer to home, Praemium’s results have also been encouraging. Despite gross flows falling 6.12% and 3.8% in Q2 and Q3, respectively, net flows increased 6.49% during the second quarter and upticked 17.60% in Q3.
This evidences that those working within the sector - providers, platforms, and advisers – are showing their mettle. The advice profession was quick to implement Covid-safe working practices to ensure uninterrupted client service, even in the face of increasing demands on time providing reassurance about portfolios during volatile market activity. In some cases, firms may have seen workload increase but revenues fall, most notably those charging ongoing percentage fees with falling markets hitting client portfolio values.
How the sector has fared should also be balanced against the broader economic picture. On a macro level, both developed and emerging countries have been fighting fire on all sides: travel restrictions kyboshing tourism, healthcare systems under mounting pressure, and governments straddled with increasing debt after introducing support measures in a bid to keep businesses afloat. Some industries, such as airlines, will take many years to recover.
The same can be said about global economies – according to forecasts, few will escape unharmed. A report by the World Bank, published in June, predicted 93% of countries to plunge into recession during 2020. In addition, the Bank of England expects the UK economy to shrink 2% in the fourth quarter of this year after the government was forced to reintroduce further lockdown measures during November putting even more stress on an already weakened economy.
In financial services, it would be fair to have assumed that temporary office closures and the suspension of face to face client meetings would have taken a greater toll.
Yet, platform assets have also held firm. From Q2 to Q3, asset under administration increased from £448.93bn to £461.90bn. This may prove to be a short-term trend, of course, and we’ll have to see how the situation pans out over the coming months. But we think it’s important to recognise the hard work that advisers put into making sure their clients have received and will continue to receive, the reassurance and expert advice to guide them through this extraordinary period.
It should certainly fill the supervisory authorities with sufficient confidence that financial advisers and platforms can weather the most testing of times.
1 Lang cat Platform Market Scorecard August 2020 p23-24.
2 Lang cat Platform Market Scorecard November 2020 p21-22
3 World Bank Global Economic Prospects - https://www.worldbank.org/en/publication/global-economic-prospects - June 2020.
4 Lang cat Platform Market Scorecard November 2020 p20.