Investment platforms have disagreed with the Financial Conduct Authority that ceding platforms should conduct share class conversions for departing customers in their response to a consultation on the regulator’s Investment Platforms Market study.
The FCA wanted feedback by 14 June 2019 on clients changing platforms in regard to unit class switching, how an exit fee should be defined, the scope of the intervention from the FCA and whether there should be a ban on such fees or a cap.
In March, it proposed the following:
- Platforms should offer consumers the choice of transferring units in-specie where the same investment fund is available in both the ceding and receiving platform;
- The ceding platform should take the necessary steps to bring about conversion of the units which the receiving platform can accept for an in specie transfer, where the client’s investments via the ceding platform is in units of a class not available for purchase in the receiving platform; and
- The receiving platform should offer consumers the option, as part of the funds transfer process, to convert units into discounted units, where they are available for investment by the consumer.
Financial services firm Quilter has called on industry to support an overhaul of the re-registration process, which would see fund managers conduct share class conversions in order to facilitate in specie transfers (where the assets move without having to be cashed in).
While Aegon has supported the FCA aims of making in specie transfers between platforms available to all despite highlighting significant issues with the FCA’s proposal of in specie transfers and unit class conversions and called for a “more radical industry wide solution” as an alternative.
Simplicity is key
Quilter said it is backing the FCA’s proposals to make transferring platforms simpler and quicker.
It is supporting the watchdog’s suggestions that customers should always have the option of an in-specie transfer; that receiving platforms should offer customers the option to invest in the cheapest available share class appropriate for them; and that exit fees should be banned with the rules extended to firms offering “comparable services” to platforms.
Some industry players are calling for the abandoned platform to conduct share class conversions, however Quilter believes this would lead to a number of disadvantages:
- Platforms would be required to hold thousands of new share classes, increasing the risk of customers inadvertently selecting an unintended share class and/or not the cheapest available;
- There may be an additional cost for platforms holding thousands of new share classes, which may be passed on to customers in higher platform fees; and
- Increased operational complexity for platforms holding additional share classes, potentially increasing the likelihood of error.
It recommends that the industry provides an optimal solution which would see fund managers, who are already instrumental in the process for in specie transfers, conduct share class conversions at the same time as they are updating ownership records on unit registers as in specie transfers are completed.
Quilter is calling for “in-flight” conversions – effectively conducting the in specie transfer and the share class conversion simultaneously.
Issues
Aegon has said it wants the platform industry, fund managers and the regulator to explore developing new functionality so fund managers can carry out share class conversions as part of the re-registration of the client’s assets between platforms.
Steven Cameron, pensions director at Aegon, said: “The FCA’s aims of ensuring everyone is offered the option of an in specie transfer of assets when switching platforms is admirable.
“But requiring the ceding platform ahead of transferring to arrange conversion into a share class available on the new platform could result in thousands of extra share classes having to be added, creating significant initial and ongoing costs and potential delays.
“While it’s only right that platforms don’t put barriers in front of customers leaving, the proposed approach places too much onus on the ceding platform.
“Receiving platforms keen to attract new customers might have more incentive to arrange the conversion but they would then need to have access to the previous platform share class, something which fund managers might not agree to.”
Radical solution
Cameron added: “We are urging the FCA to work with the platform industry and fund managers on a radical new solution under which fund managers would undertake the share class conversion as part of the re-registration of the client’s assets between platforms.
“This alternative approach could lead to a more streamlined, cost-effective, customer friendly and forward-looking solution.
“While we agree in specie transfers should be offered to all customers, the benefits over cash transfers are less for pensions or Isas as here, encashing the underlying assets does not create a capital gains tax liability.”
Steven Levin, chief executive of Quilter’s platform, Old Mutual Wealth, added: “Switching platforms should be simple, straightforward and efficient for customers and the whole industry has a responsibility to deliver that. We need to agree, as an industry, how it is most appropriate to execute the conversions.
“Enhancements to existing technology used across the industry will be required, but we believe that making fund managers responsible for undertaking the conversion is most likely to produce a good outcome for the customer.
“We ask the industry to come together, with the support of the FCA, to explore this option in detail.”
Exit fees
Investment platform AJ Bell also spoke about its issues with the banning of platform exit fees.
Its chief executive Andy Bell said: “Whilst I appreciate what the FCA is trying to achieve with the proposed rules for a restriction or ban on exit fees there are a number of issues which I feel the FCA need to take into consideration.
“One of the main issues is how the FCA distinguishes product exit fees from other exit fees. If this is not dealt with in the right way it will create an uneven playing field whereby some exit fees are permitted and some aren’t.
“This will be confusing for consumers, open to manipulation by product providers and hence difficult to regulate.
“We believe that there is a very considerable difference between fees that are applied to effectively penalise a client wishing to withdraw from a firm’s services and those that are levied purely with the aim of covering the costs involved in administering transfers.
“Firms incur specific costs when transferring clients assets and we believe we should have the ability to recover those costs from the clients involved rather than subsuming them within our general business costs, which would then inevitably be recouped via charges levied on all clients regardless of activity.
“The platform industry rarely charges an exit fee on customers wishing to transfer cash.
“Where an in-specie transfer between platforms is being initiated, our favoured solution to recognise the work involved, is that exit fees are restricted to the maximum cost as if all of the assets were converted to cash, using the cheapest dealing option available.
“This would significantly lower the charges for consumers whilst enabling platforms to recoup reasonable costs.”
The FCA is expected to publish its response in winter 2019.
