Regulators have finally realised the risks of platform technology firms

Just imagine if several adviser platforms all went down at the same time. That scenario should have terrified regulators and advisers for years, but apparently it hasn’t. Until now, that is.

The underlying technology for many platforms is run by a FNZ, and the FCA has ordered a so-called S166 review into the business, according to reports last week. 

For the uninitiated, this is the FCA calling in the heavies because they suspect something is amiss.  Normally carried out by top law firms or consultancies, S166s are expensive. In this case, FNZ will have to stump up for a probe by Grant Thornton.

They’re not exactly rare, but they aren’t exactly called on a whim either; in 2022/23 the FCA ordered 47 of them, and it regulates some 45,000 businesses. 

The names of the firms under scrutiny aren’t published – they are innocent until proven guilty – apart from a potential cursory mention in enforcement notices later on, making the leak all the more curious. 

We don’t know the exact nature of the review as it stands. The FCA’s contract portal refers to a “Skilled Persons Review to assess and provide a view of the control framework the firm has in place”. I don’t wish to speculate beyond that, but it sounds as good a place as any to start, because such issues have been allowed to fester for far too long in the platform technology space.

Millions and millions of investors rely on FNZ kit, and have zero idea that they do. Platforms, the front-end interface, have faced far greater scrutiny over everything from exit fees to client cash holdings in recent years, when arguably the biggest issues that have actually impacted advisers and their clients have stemmed from efforts to update the technology behind them. Efforts run by the likes of FNZ. 

For years, platform wonks have complained that in reality, their lives are in the hands of tech nerds seven steps removed from the actual planning process, sitting in places like Brno in the Czech Republic, handling jobs for dozens of clients across the world, all working to different timescales and jurisdictional quirks. If things go wrong, the end client feels the pain in terms of disrupted service, or increased platform fees to help put things right. 

Too-big-to-fail risk has exercised banking regulators ever since Lehman Brothers collapsed. ‘Critical third parties’, technology infrastructure and operational resilience sit right at the heart of that work. The FCA has clearly not prioritised the issue in the same way for the platform space. FNZ has been allowed to grow to oversee £400bn in assets and 30 major migrations across the world with relatively few checks. 

FNZ racked up an operating loss of £267m in 2022. It had acquired some 20 firms since 2018, including six in that year alone. In any other sector, such consolidation and concentration of power might have raised a few eyebrows before now – particularly as it is now also starting to cut headcount. 

The one exception is the Competition and Markets Authority, which blocked FNZ’s attempt to secure even greater market share in 2020 by buying out rival GBST – which runs the likes of AJ Bell and Wealthtime — over significant competition concerns. Maybe the FCA’s S166 is a sign that the rest of the regulatory wheelhouse is sitting up and starting to pay attention.

Of course, there is also a significant chance that this all could just blow over. The regulator and FNZ could come to a gentlemanly agreement to tweak a few bits and bobs, put some safeguards in place and that will be the end of it. 

And, of course, there are very good arguments for having firms with sufficient scale and expertise running billion-dollar migrations. Competition is all well and good in such a market, but would you want a three-man start-up handling such critical infrastructure when investors’ life savings are on the line?

But at the end of the day, the S166 will hopefully be a huge step forward in shining a light on what has historically been an opaque corner of the market. Advisers and regulators simply don’t seem to have had enough information to date to know for sure whether the likes of FNZ are up to an incredibly demanding job. 

If FNZ has to stump up a bit of cash to prove everything is hunky-dory to us all then so be it. Advisers’ platform lives – and their clients’ – depend on it.