Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.
The Financial Conduct Authority's (FCA) 'platforms paper' released last Friday has, as expected, generated much debate. At one end of the scale the paper was pronounced "profoundly disturbing" while at the other "a bit of an anti-climax".
In our view, the paper sits somewhere in between. Following on from our report and comments published on Friday, here are six implications, some obvious, others less so, that we think arise as a result of the FCA's first significant attempt at addressing platforms:
1 The platform charge rule
As expected the FCA proceeded with its core proposal and mandated that platforms for the most part be remunerated by a platform charge paid directly by clients for both new and existing business.
Obviously this means that all platforms which do not have an explicit charge must now quickly look to introduce one. The rule will have its biggest impact on those who have been using some or all of the rebates currently available to platforms from fund managers to subsidise the explicit cost of the platform and those who have large books of existing business where no (or a subsidised) explicit platform charge has been made. Firms in this position need to consider how best to migrate customers to the new charging regime and how to recover any revenues lost as a result of the change.
While the platform charge rule was the headline, the FCA did list some explicit charges platforms may make of product providers and confirmed that platforms can charge adviser firms for services. Over the coming weeks, we will no doubt hear views on the extent to which these additional charges could be the beginning of a source of replacement income.
For non-advised business and particularly for platforms active in acquiring new customers, the introduction of a platform charge may require a fundamental change of business model. For some, the challenge will be to develop a new charging model in order to cover acquisition and servicing costs in a way that does not deter consumers who are uncomfortable with the idea of paying upfront.
2 The exceptions to the rule
The FCA accepted that there is "a reasonable argument" that there are some circumstances in which platforms should still be entitled to charge product providers. It listed these as:
- 'one-off events' such as a request to correct a pricing error and expenses incurred in dealing with a corporate action taken by a product provider;
- providing management information to product providers regarding clients who invest in their products; and
- "payments in relation to advertising products on the platform."
On the face of it, the new rules do not appear to allow for the exempted circumstances to be treated as mere examples that enable for further payments to be made by analogy. From a policy perspective though, there may now be a discussion as to whether the FCA were correct in isolating 'pricing errors' and 'corporate actions' as the only instances in which 'one-off events' should be remunerated or whether they should be viewed as indicative of other payments which can also be made.
In relation to the 'advertising payments' exemption, it is unfortunate that the FCA did not go further and provide more detail in respect of the types of activities which it considers to fall within the scope of platform advertising services. Its further statement that "If we see any abuse of the rules in this area, we will consider banning all types of payment between a product provider and platform service provider," seems unfair, given that it has only provided limited guidance as to when an arrangement between a product provider and a platform may fall outside the scope of this exception.
3 Legacy business
While the platform charge rule will apply to legacy business, the FCA has allowed a grace period, taking the view that "moving all consumers' assets to a platform-charging basis within a year from final rules being confirmed would be operationally challenging." Platform charges for legacy business need only take effect from 6 April 2016. But the FCA cautioned that "We do not expect firms to wait until 6 April 2016 to move all customers with legacy assets to the new charging structure" and that it " would expect most customers to have been moved to an explicit charging model before then".
The FCA has defined 'legacy payments' as "payments that relate to those retail investment products held on a platform before these rules coming into effect and which the platform is still holding when the rules are in force". It said that legacy payments include payments in relation to "regular savings products (where the amount invested does not vary) and any changes made through rebalancing as a result of instructions given before the implementation of the rules".
In practice the FCA's definition of legacy payments may mean that in any event many assets will need to be converted before the 2016 deadline. Clarification is needed on whether, where there is any switch, additional investment or anything other than automated rebalancing, an explicit platform charge needs to be introduced in respect of individual payments only or across a client's whole portfolio.
Platforms will also need to consider carefully the extent to which their legacy business can be transferred in bulk or must be migrated on a client by client basis. The cost implications of case by case migration will be significant so it is important that platforms are completely clear of the circumstances in which case by case transfer is needed.
More discussion is also to be had as to how both advised and direct to consumer platforms deal with those 'dormant' clients with whom they have limited contact. The issues surrounding 'active' consent of course is a central one which we will revisit in a future entry of this blog.
4 Cash and non-cash rebates
The FCA's move to ban all but minor (£1 per fund per month taxed) cash rebates means that platforms will need to look closely at arrangements for ensuring that regular funds are being added to cash accounts to pay fees.
Questions remain as to how platforms can guard against shortfalls occurring in the cash account. In response to the adviser charging requirements, auto-disinvestment policies have been discussed, with some suggesting disinvestment from the largest fund on the platform, others taking a proportion of all funds held or preferring disinvestment from the least volatile fund. Particularly for non-advised business, whatever approach a platform takes, transparency will be critical. As the FCA will likely continue to focus on the client best interest rule, platforms should take care to ensure that the ways in which funds are sold down and charges are deducted do not create unforeseen detriment for clients.
As regards non-cash rebates, the FCA had little to say beyond noting that "Given the tax treatment of rebates as clarified by HMRC, it may be more efficient for fund prices to strip out most or all of the rebate built into fund prices". Some thought will need to be given to the circumstances in which a unit rebate approach remains sensible, perhaps where minor adjustments cannot be achieved in other ways. Despite popular opinion, unit rebating may still be a topic of discussion in the context of using preferential share classes as between different platforms.
5 Move to clean share classes
The FCA has acknowledged the accelerating move to clean share classes in light of the HMRC's position on rebating.
In the FCA's view multiple share classes remain unaffected by its policy on rebates and it has noted that "a small number of firms suggested that offering a limited number of different share classes may not be as costly or operationally difficult as many had previously suggested." It has however linked multiple share classes to the issue of product presentation on platforms. Platforms must be careful to ensure that they present products in a way that is 'fair, clear and not misleading.'
The FCA has also remained conscious of the debate as to whether clean share classes will ultimately cost consumers more. Its response to this discussion is that "We do not expect these policy changes to be used as a reason by the industry to increase the fees they are able to receive". It has cautioned that "With regard to the TER [total expense ratio] on funds, if we see the average TER across the industry increase as a result of these changes and the movement to clean share classes, this will add weight to the concerns we have around pricing and competition in this market."
For vertically integrated businesses, the FCA clarified the circumstances in which product costs should be viewed as cross-subsidising the platform charge, in contravention of its rules. It said that "The platform charge should essentially be similar across all products on a platform when there is not an appropriate reason for it to vary."