It costs anywhere between $30 million and $100 million to establish a retail investment platform and the Australian Competition and Consumer Commission (ACCC) believes no new players will be ready to ante up.
In addition, the ACCC implied that the ability of any new player to ante up could be significantly curtailed by the degree to which the Government’s Future of Financial Advice (FOFA) reforms impact on arrangements such as volume rebates.
That is the bottom line of the competition regulator’s decision last week to veto National Australia Bank’s (NAB’s) revised bid for AXA Asia Pacific on the basis that it would divest AXA’s North platform to IOOF.
In rejecting the revised NAB bid, the ACCC sent a signal to financial planners that it did not realistically expect any new players in the platform market, noting that the last successful entrant was Macquarie 10 years ago, while the most recent failure was the Credit Suisse MasterWrap platform, which lasted just two years after being launched in 2004.
The rejection decision has effectively signalled to the three dominant players in the platform space — Westpac, NAB and the Commonwealth Bank — that they must grow organically in circumstances where growth through major acquisition faces veto.
According to data compiled by Wealth Insights, Westpac is the dominant player in the platform market on the basis of its control of BT and St George, while the next biggest players are the Commonwealth Bank and NAB via their control of Colonial First State and MLC.
According to the ACCC’s analysis, NAB’s control of AXA Asia Pacific would have handed it control of between 29 per cent and 37 per cent of the funds under management (FUM) on platforms for investors with complex investment needs.
By comparison, it said a merged AMP-AXA or AXA, as a standalone entity would hold FUM in the range of just 7 to 8 per cent.
In doing so, the ACCC effectively ruled a line under the level of bank domination of the platform space and, by definition, the big banks’ domination of the advisory space by clearly linking the ownership of platforms to planner distribution networks and those who control them.
The ACCC not only pointed to the underlying costs of establishing a retail investment platform but also then gaining sufficient scale in FUM, securing access to distribution via financial planners and developing a strong brand and reputation in the industry.
“The ACCC’s inquiries indicated that the primary method of attracting scale is through the distribution networks of aligned financial planners that can channel client funds to a particular platform,” the ACCC’s analysis said.
It said that scale might also be attracted through non-aligned planner channels and that “new entrants have previously gained scale by paying volume rebates to dealer groups”.
However, the Government’s FOFA reforms have brought volume rebates into serious question, effectively undermining the ability of new players to attract market share away from established players.
NAB late last week signalled it was reviewing its options following the ACCC’s veto of its revised offer but its only recourse would now appear to be via the courts.
The ACCC decision was handed down by acting chairman Peter Kell after chairman Graham Samuel stood aside late last month.