The Financial Conduct Authority has introduced a piece of regulation to make investment platform switches easier and fairer to clients.
The ‘Making transfers simpler’ policy statement addresses long-standing concerns; including obstacles in switching, lack of investment unit conversions and responsibility among providers.
Financial advisers, fund managers, platform providers and clients are the ones affected by the regulation.
It sets out criteria for making in-specie transfers available.
These are defined by the FCA as a transfer “where a customer’s investments (eg units in a fund) are transferred directly from one platform to another, with the customer remaining invested throughout”.
This was set out due to some consumers being forced to liquidate their holding before switching platforms.
Focus on customer outcomes
Under the policy statement, clients will no longer be required to disinvest, as the regulator has introduced rules where platforms will need to request a conversion of unit classes to enable an in-specie transfer to take place.
As part of its focus on customer outcomes, the UK watchdog has mandated that the receiving platform offer discounted unit classes to the clients where available.
But there were a few issues raised during the consultation process regarding unit conversion and investments made available by different providers.
For instance, funds within a model portfolio could include specific unit classes; which, by selecting a different one, could lead to the wrong implementation of a specific investment strategy set out by a financial adviser.
The FCA said: “Where a consumer is acting on advice, we would expect the adviser to provide information to ensure that the appropriate unit class is selected.
“We would also expect the adviser to provide justification where they recommend a more expensive unit class, eg where this is needed to maintain the integrity of a model portfolio.”
These rules will come into force on 31 July 2020, to allow firms time to become compliant.
Lower costs
Steven Cameron, pensions director at Aegon, said: “It’s very encouraging that the FCA’s investment platform market study concluded that this important and fast-growing market is on the whole working effectively.
“We are pleased that the FCA has given the industry the opportunity to develop its own solutions rather than imposing new regulation.
“We understand why the FCA wants to make in-specie transfers more widely available, including where different share classes are available on the ceding and receiving platform.
“This is particularly important where assets are held outside of pensions or Isa wrappers and cash transfers would generate a capital gains tax liability.
“We are pleased that the FCA supports the development of new technology solutions including ‘in flight conversions’ under which fund managers would carry out the share class conversion and re-registration within a single automated process.
“We believe this would avoid increasing costs, complexities and timescales for in specie transfers,” Cameron added.
Re-thinking RDR?
But Tom Selby, senior analyst at AJ Bell, said that the measures introduced by FCA’s rules are already common practice within the industry.
“These changes won’t remove the complexity of multiple share classes which is arguably a bigger barrier to transfers, because not all platforms can hold all share classes.
“The solution here is to reintroduce cash rebates, on the basis that these must all be paid to the customer’s account and cannot be retained by the platform.”
The UK regulator, however, said that cash rebates were banned as part of the Retail Distribution Review (RDR) because “they had the potential to give consumers the incorrect impression that there was no charge for the platform (or advice)”.
“It is disappointing the FCA has decided against this,” Selby added.
“Reintroducing cash rebates would enable there to be a single retail share class for each fund with platforms able to negotiate discounts for their customers in the form of cash rebates that are paid into the customer cash account on the platform.
“Fears that these cash rebates will be used to confuse platform pricing are unfounded, and a single share class per fund would enable far easier transfers between platforms.”
Facilitating fair competition
The FCA said that one of the reasons for introducing this set of rules was to expand and improve competition among platform providers.
This is why the regulator is going to start a consultation in Q1 2020 regarding exit fees.
Selby welcomed the review of exit fees, but also believes the watchdog should take into consideration those charged for all products, not just the ones applied to platform transfers.
He added: “We note the FCA is planning to consult on exit fees early next year and we look forward to participating in that consultation.
“We are supportive of the FCA’s direction of travel here, and we believe any ban or cap on exit fees should be applied across all similar products and services, including life company products and vertically integrated firms.
“Exit fees are not unique to platforms and therefore it is not right to look at them in isolation. The most pernicious exit fees in the market are those that are embedded within products that are designed to recoup upfront costs of selling the contract – these can be as high as 5-6%.
“Applying any ban or restriction on exit fees across the whole industry would ensure there is a level playing field for what are very similar products and would be a good outcome for customers.”
