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Conversion to 'clean' share class must not disadvantage investors, says FCA

Out-Law News | 24 Oct 2013 | 5:25 pm | 2 min. read

Platforms should not change the share class of retail investment clients' assets to ones which are devoid of commission or rebating charges where those investors would be left "disadvantaged" by the move, the Financial Conduct Authority (FCA) has said.

In a new guidance consultation paper on changing customers to post-Retail Distribution Review (RDR) unit classes (5-page / 98KB PDF) the FCA said that the move by platforms to change to a 'clean' share class model must respect rules requiring them to act in accordance with the best interests of their clients.

If clients stand to lose out as a result of moving their assets to clean share classes, platforms should not go ahead with the change, the regulator said.

"We would expect in most cases that the clean unit class would be exactly the same as the pre-RDR class, with the only difference being the reduced annual management charge," the FCA said. "However, if this is not the case, and if a client is in any way disadvantaged by such a conversion, we would not expect that conversion to take place – so we would expect the effect of the conversion on clients to be considered."

Many platforms have taken the decision to move away from offering financial products for investment that involve issuing rebates to investors, which can sometimes be offered as an incentive for selecting particular products to invest in. The move within the industry comes after the Financial Conduct Authority (FCA) outlined plans to restrict cash rebating and follows an earlier announcement by HMRC that rebates, whether in cash or unit form, would be subject to income tax deductions.

Several platforms have subsequently announced a change to their business models in order to avoid having to account for rebating and income tax calculations and as such have been seeking to switch clients' assets over to ones with 'clean' share classes, where neither commission nor rebates are payable.

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.

The FCA has said in its draft guidance that unitholders have the right to convert assets from one share class to another, but warned that where a nominee is acting on behalf of a beneficial owner, that underlying investor should be informed by the nominee of its intention to convert the share class of assets and be "given the option to object".

When the retail investment client is the unitholder, platforms must obtain their "express permission" before converting their assets to clean share classes, the FCA said.

The regulator said that it should be clients that request the conversion to take place or "at least provide their explicit consent" for it to happen. However, it warned that platforms could be at risk of giving advice, and therefore being subject to wider rules under the RDR, if they present investors with a "recommendation ... to convert to the clean unit class".

"A notification that a clean unit class exists (without a specific recommendation to convert to that class) does not constitute advice," the FCA said.