Platforms can mitigate costs from transfer to clean share class products, says expert

Several platforms have recently outlined plans to alter their business models to move away from offering products where rebates are paid to investors. In general, the move will see platforms reduce the annual management charge they levy for the operation of investor accounts but remove the payment of rebates investors can sometimes receive as an incentive for selecting particular products to invest in.

The move comes after the Financial Conduct Authority (FCA) recently detailed plans that would place restrictions on cash rebating, and follows an announcement by HM Revenue & Customs that rebates, whether provided in the form of cash or units, are generally liable for income tax deductions. 

A number of platforms have, however, raised concerns about the cost that will be associated with transferring clients from products with legacy share classes to those with clean share classes.

David Ferguson, chief executive of the Nucleus, said that it could "take a few years" for the transfer of client assets to take place if it had to be done "on an individual basis", according to a report by New Model Adviser. Whilst it would be easier for the transfers to be made in bulk, Ferguson said that because those systems would only be needed once, "no-one has the systems set up to deal with these millions of transactions every platform has to perform to go clean".

Hugo Thorman, managing director of the Ascentric, said that it could cost "millions" for platforms to manually transfer client investments over to products with clean share classes, the New Model Adviser report said. This cost would be more than Ascentric could afford, Thorman said.

Financial services law specialist Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said that platforms could try to "contain" the problem relating to transfer costs by limiting as far as possible the "dirty" share classes made available to investors going forward.

Platforms may also look to avoid incurring unnecessary costs through "moving clients over early" by waiting to see if investors move their investments over to those with clean share classes before the new platform rules are due to take effect, Ashby said.

The platform rules are due to take effect from 6 April 2014, however the FCA has said that it would continue to allow "legacy" payments to continue until 5 April 2016 where the arrangements have been put in place before 6 April next year.

"It is unclear whether there will ever be a 'silver bullet' systems solution to help convert clients in bulk that also deals with the legal issues, but there are ways platforms may be able to reduce the cost liabilities platforms will face when they eventually have to carry out those transfers," Ashby said.

"While looking into longer-term developments of new systems that would allow clients' investments to be transferred to products with clean share classes in bulk, platforms may at the same time be able to take the short-term decision to only make clean share classes available to new investors," Ashby said. "Some existing clients may make the natural progression to clean share class products in the interim period. It would seem to make little sense to rush into manually transferring all clients over when that process may occur naturally for some, although of course this will need to be weighed against the FCA's stated expectation that firms will not wait for the deadline to move legacy business."