The Financial Conduct Authority (FCA) said it will look at how platforms and similar services offered by banks, insurance companies, financial advisers and asset managers compete, and whether they use their bargaining power from pooling money to benefit investors.
"Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice," Christopher Woolard, FCA executive director for strategy and competition, said in a statement on Monday.
The watchdog said six of the 10 largest operators were "vertically integrated" or tied to an asset manager, and such commercial ties have the potential to "distort" competition.
The plaforms sector has around 692 billion pounds under management, the FSA says, equivalent to around 78 percent of the retail investment market. The watchdog said its study will look at platforms that do and do not offer advice on investments.
Paul McGinnis, analyst at financial group Shore Capital, said he did not see anything surprising in the terms of the study, and early share price reaction among the leading listed platform providers was muted.
The study is part of a wider "value for money" push in the funds sector and was flagged in its broader market study of the asset management sector in June.
The FCA said Cofunds, Funds Network, Standard Life (>> Standard Life) and Old Mutual (>> Old Mutual) were the largest among "advised" platforms. Hargreaves Lansdown (>> Hargreaves Lansdown), Barclays Stockbrokers (>> Barclays), TD Direct Investing and Fidelity Personal Investing led the "non-advised" pack.
"We will assess whether investors and advisers can assess the value for money of investment propositions, including investment products and platform services, from the information platforms make available," the FCA said.
It will also look if there are barriers for new entrants into the sector, and what are the main drivers of profitability,
It aims to publish an interim report by summer 2018 which will set out preliminary conclusions and any potential "remedies" or actions to address concerns.
The FCA could introduce new rules, publish guidance for the sector, force individual firms to change their behaviour, and take enforcement action.
Shore Capital's McGinnis said he did not expect Hargreaves Lansdown, the sector's largest direct to client platform, to be hit hard by the review.
Hargreaves was "very explicit in the way in which it negotiates and passes though discounts from fund managers to its customers", he said in a note, flagging a 'buy' rating and 1,279 pence price target.
Bernstein analyst Edward Houghton added that wealth manager St James's Place "did not look particularly exposed, as the firm does not have a non-advised offering and makes asset allocation and manager selection decisions on behalf of clients".
At 0757 GMT, shares in Hargeaves Lansdown were up 0.4 percent, in line with the FTSE 100 <.FTSE> index of leading shares, while shares in St James's Place were up 0.9 percent.
(Editing by Jason Neely and John Stonestreet)
By Huw Jones and Simon Jessop