three cheers for the fca mps review

by Henry Cobbe CFA, Founder and Head of Research at Elston Consulting

There are two structural drivers to MPS (Managed Portfolio Services) growth: the shift from advisory models to managed models, and the shift from standard portfolios to custom, advisor-defined portfolios.  These trends create greater operational efficiency for advisers whilst retaining their vision, strategy and IP.  No wonder this explosive growth is a focus area for the regulator.

Firms that are focused on maintaining and improving standards will welcome the FCA's MPS review. Based on some of the questions that have been shared with the press, the topic areas make for interesting reading. ​

What is the FCA MPS review looking at?

Co-manufacturing

Firstly, and rightly, there is a keen focus on co-manufacturing arrangements. Co-manufacturing is where one firm has input in the design of an investment solution used by another firm, for example the use of asset allocation models from risk profiling companies, or involvement in the firm's investment committee. It’s a concept we helped pioneer back in 2018 in direct response to the new PROD rules!  Some providers are trying to scare advisers about the risks of co-manufacturing.  But the main (only written) requirement as per the PROD rules is to have a documented agreement in place setting out respective roles and responsibilities.  The unwritten rule is the extent to which one party’s inputs influence the overall proposition is key.
All firms, whether regulated or not, whether client-facing or adviser-facing, have an obligation under the Consumer Duty to consider consumers' best interests in any solution where they have substantial input into the design. We'd expect the same if someone was involved in constructing a bridge. It is and should be the same for a portfolio.
We have encouraged all the adviser firms that we work with to have documented co-manufacturing agreements in place from the start. It's not new: it's been part of the product governance rules since 2018 that we use to kick-start the Custom Portfolio (also known as Tailored MPS, or (confusingly) Bespoke MPS).
When it comes to co-manufacturing, we see good, bad and ugly practice. Good, in our view, is open architecture, where the adviser can plug and play different providers to deliver their solution. Bad is closed architecture, where the adviser firm becomes captive to a provider, whether through a minority share position, control of the investment committee or other forms of exclusivity. The ugly is where payments are made to the adviser firm from the provider. These were banned under RDR and the rules are clear cut. We think part of the MPS review will be to weed out and differentiate this spectrum of good and bad practice.

In-house funds

The second focus major area from the questions is the use of in-house funds. Again, this can be done very usefully to a client’s advantage, or very badly to a client’s disadvantage.
It’s not a simple case of inhouse funds are good or inhouse funds are bad.  The detail is always in the detail.
Where inhouse funds can help portfolios is around access.  Given the well-documented delay and friction in traditional platforms enabling ETF trading, MPS on those platforms are limited to daily priced funds. This therefore excludes direct access to key exposures such as physical gold, oil, commodities and outcome-oriented active ETFs (for example with embedded protection strategies, income overlays or other helpful features).  It’s why we helped pioneer “Funds of ETFs” back in 2020 that trade a basket of ETFs within a fund wrapper, so clients can access and benefit from the diversification, liquidity and breadth that ETFs can bring.  We built Funds of ETFs for our Funds clients specifically because platforms were failing to upgrade their systems.
So where in-house funds are good value for money, provide a differentiated solution and have a key portfolio function to play, we see that as beneficial.
Unfortunately, there are examples of bad practice too.  This can be unintentional (funds lack sufficient scale to be commercially viable at a consumer-friendly price point) or deliberate (funds are structured to generate additional barely substantiated fees for advisers or their parent or other associated company). 
We expect that the findings of this part of the FCA MPS Review will lead to a review of the 2014 Distributor Influenced Funds rules that need an update and a refresh.

Portfolio design and governance

The third area should be welcomed by all parties: a deep dive into the discipline of portfolio design and robustness and resource around the governance and oversight of MPS solutions. The regulator is asking about stress testing, access to research resource, liquidity monitoring and other quality control features. Again, this should come as no surprise to experienced providers.  The regulator is simply aiming to ensure high standards for the creation and management of MPS solutions.
For professional DFMs, this should be happening as a matter of course. Adviser firms who have just obtained DFM permissions should be striving towards it, aligning their systems, processes and controls to the levels expected of leading third-party managers.
The regulator wants to ensure a level playing field and high standards.  It rightly sets a high bar, that the industry should support in defence of consumers.

What we called for

In our 2025 suggestions for the FCA MPS Review, we called for four focus areas.
The first was standardising disclosure. It seems wrong that multi-asset funds have extensive disclosure around benchmarks, costs, fees and objectives, whereas for MPS there are no requirements whatsoever. Reporting is not done consistently, with some firms reporting gross of fees and some net. This is a key area for standardisation.
The second was co-manufacturing agreements, and the third the use of in-house funds. We're glad to see both reflected in the questions coming from the regulator.
The final point, where we think more focus is needed, is the risk of greenwashing. The regulator has been clear about SDR rules for funds, but (following successive delays) not how to extend them to managed portfolio services, leaving investment managers in the dark. We believe in espousing best practice, so went beyond the original consultation paper's CP22/20 proposed minimum 90% allocation to SDR funds to qualify as “Sustainable” and so last year Elston Portfolio Management launched sustainable portfolios with a 100% SDR allocation. It's disappointing that the FCA MPS review is thus far silent on Sustainability disclosures for MPS.

Conclusion

For investment managers internally reviewing their MPS proposition, or advisers reviewing standard or creating co-manufactured solutions: we believe that the FCA MPS Review will help raise standards across the industry – and that is welcome.