Out-Law Analysis | 17 Jan 2014 | 9:00 am | 6 min. read
The transfer to clean share classes
This issue has polarised the platform industry in recent months, frequently along lines set by individual platform's propositional constraints. Following the publication of the Financial Conduct Authority (FCA)'s PS13/1 policy statement on payments to platform providers and cash rebates (54-page / 1MB PDF), and some further guidance, some firms have already acted decisively. All platform firms need to be settled on their charging approach and remove any reliance on rebates for a fast-approaching April deadline.
Planning for the legacy deadline of 2016 is also needed. Firms will need to be ready either for bulk transfers, or to allow customers to move as and when their investments change in line with FCA guidance that was subject to recent consultation. Adviser firms that are not using, or moving entirely to, a fee-based model will also want to understand any impact on existing payments to them through legacy rebates.
Variations in overall fund charges between clean and legacy share classes have muddied the waters for bulk transfers. Potential customer detriment in moving from legacy to clean share classes is still very much a live issue that needs to be addressed by firms before any transfer takes place.
Charging pressures for platforms are coming from all sides, from simple commercial competition to the regulatory introduction of the 'platform charge' on 6 April. This situation is fuelling some innovation on pricing, as well as price reductions. Platform firms are also trying to demonstrate the quality of service behind their charges.
The regulations coming into force in April draw the charging lines more clearly between platform providers and fund managers and the winners and losers will become clearer as the year progresses. Any arrangements with fund providers or involving intermediaries, taking particularly into account further regulatory focus on inducements, need to be carefully thought through.
Speculation over the possible application of VAT to platform fees has also caused some alarm and it is hoped this can be clarified quickly.
Advisers who want to combine independent advice with the convenience of using a single platform, or a small number of them, may have to work hard to demonstrate continued independence. Recent high-profile network moves to restricted models have served to highlight the challenge this presents.
There may be room for innovation by using a type of 'platform of platforms' approach to maintain independence, provided that customers can be clear who their relevant provider is. If a restricted model is preferred, appropriate agreements will be needed with all chosen platform and product providers to make clear distribution channels and responsibilities.
Intermediation and the direct route
The growth of direct-to-consumer (D2C) platforms, bridging in part the 'advice gap' for mass-market investors following the Retail Distribution Review (RDR), is not incompatible with the relationship between platform and adviser firms. Firms recognise that customers currently falling into the 'gap' may not need just one solution throughout all phases of their investment life. Platform firms and adviser firms wanting to join forces on execution-only should put in place clear agreements to establish the terms of distribution to their joint customers.
D2C platforms are having an increasing impact on the retail investment market and attracting increasing numbers of retail customers. The vexed question of how much guidance can be provided to execution-only customers without it becoming regulated advice is exercising many firms.
Considerable hope is being placed by platform firms in the FCA's current review of non-advised business to help clarify the position. On the positive side, the regulator appears to recognise there is an advice gap. It is not yet clear though how, or if, the regulator will act. As the FCA does not control all of the rules applying to regulated advice, however, there is a danger of any proposals on execution-only falling short of the answer firms are waiting for. Firms will still need to find an appropriate route on the right side of the grey line between guidance and advice.
Some platform firms are expanding the range of product wrappers offered on their platforms, in some cases moving into non-investment protection products. For firms considering non-investment products, different regulatory rules apply to some of these products, which may affect generic literature and processes.
Platform firms wanting to add product wrappers provided by third parties need to consider how to integrate them on platform, either directly or by allowing for investment through the third party product into the platform. Aside from process capabilities and requirements, the platform and third party providers will need to agree responsibilities for investments, including any restrictions, and for customer relations. Customers themselves and advisers will need clarity on their legal relationships with both the platform service provider and the third party wrapper provider. Literature and terms of business should explain these relationships clearly and avoid contradiction.
A trend towards concentration of investment in smaller numbers of funds may lead to greater use of model portfolios and risk banding. For execution-only propositions, the risks of inadvertent regulated advice must be addressed in setting up any arrangements that might help customers move into particular investments. For model portfolios provided by third parties, responsibility to customers for those portfolios must also be clear in both platform and adviser terms with the third parties.
Platform firms may also want to broaden the type of investments they offer to include, for example, exchange trading funds (ETFs) or fixed-term deposits, or to simplify how such investments already on platform can be accessed. Investment agreements used for the supply of different investments will need bespoke provisions according to the type of investment and provider.
For firms expanding their customer base to include, trustees or corporate clients, for example, different types of client will usually need varied terms and literature, as well as flexible processes.
Expansion overseas is likely to be tempting for an online platform, perhaps making use of EU freedom of services legislation. Any firm wishing to extend its business to other countries should tread with care and treat each jurisdiction separately, even within the EU. Local regulators will almost certainly expect rules applying to local firms to apply equally to firms passporting into their jurisdiction. Local legal advice should be taken before expansion into any other jurisdiction, to ensure sufficient awareness of and compliance with local rules.
In-house or outsource
For some existing platforms, as well as new entrants, the cost of proprietary systems may become harder to justify as competition on platform charges intensifies. It may be possible to achieve cost efficiencies through outsourcing some platform processes, areas such as custody or even entire platform models. For this kind of outsourcing, robust commercial arrangements will be needed and material outsourcing requirements are likely to apply. Contractual provisions should also allow for the fact that ultimate regulatory responsibility cannot be transferred.
The regulator will want to be sure that sufficient control is in place regarding regulated activities and customer protection and that, for example, client money processes sit with an appropriate firm.
There have been plenty of regulatory developments in the platform world in recent times, but there will always be areas where new rules arise. For example, the outcome of the FCA's review of non-advised business might lead to new rules and the FCA has already referred to its impatience with the speed of firms' own progress on re-registration.
At an EU level, we can expect further focus on IMD2, MiFID2 and the proposed PRIPs regulation. Although, following RDR, the UK is ahead of Europe in many areas covered by these proposals, it is not yet clear how European requirements might work alongside the existing UK regulatory regime. The extent of application of appropriateness tests for execution-only business and KID disclosure requirements are two examples of rules that may not be designed in a way that complements the UK position.
There is talk of future consolidation between platforms, but this is unlikely to be through straightforward acquisition alone as it will be unattractive for a provider firm to have two similar platforms to look after and pay for. Transferring business between platforms that are set up differently using different systems will have its challenges and costs, as the requirements will depend on the platforms involved. Initial steps for a platform firm looking to acquire business in bulk from another platform will involve an assessment of potential customer detriment, much as with the transfer to clean share classes. The acquiring firm will also need to establish how transfers in specie can be carried out including, crucially, whether the same investments can be made available on the transferee platform. For advised business, advisers will also need to be convinced that the transfer is the right result for their customers if the business is to remain for long in its new home.
Tobin Ashby is a platforms expert at Pinsent Masons, the law firm behind Out-Law.com. A version of this article has appeared in Money Marketing