From Special Report: Platforms - September 2012
The big RDR platform shake up
Regulatory changes have put pressure on wraps and fundsupermarkets.
It may have caused a stir in the retail finance sector, but the FSA’s proposed new RDR rules for investment platforms have been many years in the making.
If you consider that platforms have been around in the UK for more than a decade, it is all the more surprising that the changes proposed would be the first of their kind – particularly their core demand that platforms operate more transparently.
But with more than £191.5bn of investors’ money sitting across some 28 platforms, the need for transparency in the sector has never been greater.
The last consultation paper in August 2011 said that advisers would need to assess a client’s requirements and be able to clearly justify why they feel that a platform is required.
At the time, it said: “If being on the platform gives the client a materially worse outcome than being off it, (for example, the costs are significantly higher on the platform), the adviser should clearly not be recommending using a platform for that client.
“We expect an independent adviser to be able to demonstrate why using a particular platform is suitable for an individual client.”
In the regulator’s latest consultation paper, CP12/12, it also cleared up the confusion surrounding rebates and commission payments. The paper proposed a ban on all payments from fund providers to platforms, starting on January 1 2014, but with additional provisions for business struck before that date.
“The way in which the consumer currently pays for the platform service hinders transparency and has the potential to negatively affect competition in the market,” the paper said.
Units, not cash
Instead of giving platforms rebates in cash, the FSA proposed investment providers should offer rebates in units. Essentially, this means that in the proposed post-RDR world, where financial firms must state their charges separately, fund manager rebates cannot be retained by platforms, but must be passed on for customers’ use in the form of additional units.
Some members of the industry have welcomed this, with many saying that it is an essential and key step towards a transparent investment landscape, and one that will enable investors to accurately assess the value of the service they are receiving. However, some smaller platforms and wraps that could be said to have weaker negotiating positions have been particularly vocal in their support for share classes that don’t offer any rebates.
This is because while the aim of the regulation to create a level, fair, transparent playing field, questions have been raised over smaller platforms’ adequacy to deal with the new charging structure.
While many of the smaller names first insisted that adapting their systems for unit rebates would not be an issue, the Tax Incentivised Savings Association (Tisa) has now said that some of its members have raised concerns about how long it will take them to update their systems so they can facilitate RDR-style rebates from funds.
The FSA has been accommodating, itself realising that some platforms may struggle with the initial deadline, which was originally in line with RDR.
It said: “Introducing the systems required for unit rebating may be more complex, with the time and costs required to introduce this differing significantly between firms. Based on the information we have obtained from firms, we consider that introducing the changes on December 31 2013 would give firms sufficient time to make the necessary changes. We aim to publish the Policy Statement confirming the final rules before the end of 2012, which would give firms over a year to make the changes.”
Tisa members, however, feel that this isn’t long enough, and want it extended to December 31 2014. This means platforms would not have to comply with their own ‘RDR 2’ rules until 2015 – two years after advisers’ qualifications rules and the commission ban come in.
However, wrap platforms such as Nucleus and Transact have told Investment Adviser that they expect to build in unit rebate facilities within three months of the rules being confirmed.
Graham Bentley, head of proposition at Skandia, says he is shocked by this. “Frankly we’ve been talking about this for two years and people have had plenty of time to see which way the wind was blowing and to be setting their business up accordingly,” he argues – although he recognises that some platforms have a difficult road ahead of them.
Will rebates help consumers?
Nevertheless, since rebates will continue, albeit in a different form, the question remains as to whether the latest proposals would make any difference for consumers.
As Danny Cox, head of advice at Hargreaves Lansdown, puts it: “We don’t need more regulation – we need better regulation.”
Hugo Thorman, chief executive of wrap platform Ascentric, argues that the only thing unit rebates will achieve is overcomplicate the industry.
“The prospect of turning to unit rebates is unfortunate,” he says. “Everyone thinks [we’re against unit rebates] because of the cost of doing that, but the cost is immaterial compared with the detriment to the client when you try and explain what it is you’re doing.
“The trouble is that the administration of giving people more units is onerous. It’ll end up costing more for the client, but it’ll be very difficult to report to the client what’s happened. That’ll be the real challenge.
“The problem is not the work we have to do. The problem is what we will end up with, which will look horrible. Trying to demonstrate and work out what your reporting will look like to the client is going to be very unclear. At the same time as the FSA is saying we should be more transparent, they do something that will do absolutely the opposite.”
Bill Vasilieff, chief executive of Novia Financial, agrees. He says that the FSA has only kept unit rebates as a mechanism for competition on charges.
“I don’t see the need for unit rebates, and actually think it’s going to be a bit of a mess. It’s not really sensible – it’s just extra work. Whether it’s cash rebates or unit rebates, the customer won’t have a clue of the difference, so I just don’t see the point of it,” he says.
Pricing after the RDR
As unit rebates look like they’re going to become a reality, however, the next step for platforms is creating a competitive proposition within the new rules. The battle after implementation of the RDR seems ultimately to hinge on price, as advisers will be even more compelled to select products and services for their clients based on whether they represent value for money.
➤ The fees
The first step is understanding how much advisers are paying a platform – particularly if platforms’ fees are definitively disaggregated from those of fund managers.
“As always when conducting any comparison, advisers need to look at the headline administration fee alongside any fixed fees, product wrapper fees or transaction fees,” says Holly Mackay, managing director of platform consultancy The Platforum.
“Generally we do see pricing inching down – we also see less variation between platforms than we used to. By the time you include the headline administration fee, all transaction fees, the treatment of cash and the net impact of rebates, the actual reduction in yield to the client can be less varied than the headline administration fee would suggest.”
➤ Value for money
The second step is calculating whether those fees represent value for money. Ed Dymott, head of commercial at Fidelity International, warns that advisers still need to pay attention to the service they are receiving for the price, rather than just the price itself.
He says: “This is a clearly a value proposition, so pricing is going to become a challenge in the marketplace. That’s the point of the RDR: it should highlight the value you’re getting for service. Price is only an issue in the absence of value.”
Mr Dymott says that the danger to the end consumer could be a “discount airline” type of structure, where the sticker price might look very cheap, but, when you start to add up all of the constituent parts, the actual cost is quite high.
The big three platforms have already begun to outline in detail how they intend to offer value for money to clients in the new post-RDR world.
FundsNetwork collects a service fee from the fund manager at a standard rate of 0.25 per cent a year. All trail is paid to either the adviser or customer as per their agreements. Cofunds has said that it will make 1,700 ‘clean fee’ share classes from 85 different fund providers available to advisers when it launches its unbundled pricing structure. Ms Mackay, however, is particularly complimentary about Skandia’s new charging structure, which she says is also relatively simple and competitive.
“What I like about Skandia’s structure is that it is relatively straightforward, with no extra product fees or transaction fees, and the platform fee (alongside a £56 drawdown fee) will be its only source of revenue. Margins retained on cash are negligible and cover running costs only. So while 50 basis points (bps) for clients in the sub £25,000 band, and 35bps for assets in the £25,000-£100,000 range, might sound relatively high compared to some peers, when it is looked at in the round with no fixed fee and no additional tax wrapper costs, we think it is broadly in line with the market,” she says.
Mr Bentley explains the key thing for Skandia as a large platform is to offer simple, fair pricing for clients that would comply with the new rules. But he adds it is also important for big platforms to work out a model that is profitable for them and preserves the advantages they already enjoy before the implementation of the RDR.
“The clear thing for us was to try and make it simple but, frankly, to be fairly priced, so it was good for the client but it was also a viable commercial price for the business,” he says.
“What’s going to be interesting is the price we obtain funds from the managers, because of course we can no longer keep those rebates – we have to pass them on. It’s in customers’ interests that we can maintain the terms that we had with fund managers before transparency. If we maintain those terms, the bigger platforms, who will almost by definition get better terms because they’re more important distributors for the fund managers, will be able to pass those terms onto their customers – hence, you’d expect the bigger platforms to win out over the smaller ones, assuming that those economic terms are maintained. Commercially, you wouldn’t expect a corner shop to be getting the same price as Tesco.”
Mr Dymott argues, however, that the variation in different charging structures could make it difficult for investors to compare offerings from different providers – particularly when trying to understand platform costs as part of the wider costs of investing in a fund.
“I guess the challenge that we see is twofold. One will be: can investors really understand the total cost of ownership [the fund’s ongoing charges plus all its other expenses]? Clearly by breaking up those elements of the value chain it’s going to become much more difficult to actually compare the total cost on a like-for-like basis. This is an area that we have been talking to the FSA about,” he says.
“As much as explicit charging is a way of getting transparency, do the mechanisms required to actually achieve that, does it actually reduce transparency in some ways, on the basis that actually each of those costs is going to be taken separately?”
Platform charges in context
After the RDR, the changes to platforms’ charges and regulation will by no means be the only revolution to hit the industry. Most fund managers are rolling out RDR-ready fund share classes that are completely unbundled – including no rebates either for advisers or platforms – ahead of the beginning of next year, seeing as the RDR bans product providers from paying advisers rebates or commission.
The likes of Franklin Templeton, Schroders, BlackRock, Rathbones, Ignis and others have reduced their annual management charge (AMC) to 0.75 per cent. Baillie Gifford has proposed to undercut this further, lining up share classes that contain a 0.65 per cent AMC. In a twist, however, Invesco Perpetual and M&G Investments – the two largest retail fund providers in the UK – are offering shares that are which offer no commission to advisers but continue to offer rebates – roughly 0.25 per cent of assets a year – to platforms. These share classes are designed to comply with the RDR changes that will take effect at the end of this year, but not the cash rebate ban that is projected to take place at the end of next year. If cash rebates are indeed banned, investors would have to switch to using new Invesco and M&G share classes on new business. During this in-between period a danger remains that platforms may be encouraged to highlight funds with share classes that contain platform rebates over those that do not, to gather rebate-paying assets in the run up to the proposed cash rebate ban.
An FSA spokesperson told Investment Adviser that the regulator does not view this as a “particular problem” – even though the FSA has already banned rebates for advisers.
“Ultimately both the adviser and the client are incentivised to pick the best and lowest cost option. There are already some incentives for platforms to prioritise [one fund over another]. Until our rules come in there is not much we can do,” the spokesperson said. The FSA added that fund shares with lower annual charges – which could be achieved by excluding rebates – would also be beneficial to managers, as higher costs can make performance data appear worse.
There are also a number of areas where further clarity is required, especially around the desired treatment of non-advised platforms like Hargreaves Lansdown’s main Vantage platform. Mr Cox says Hargreaves Lansdown, to take an example, has already reverted to the FSA “with a couple of queries on a couple of things that we want some clarifications on”.
The FSA has said that it will make a final ruling before the end of the year, where it will look at whether the cash rebate ban in particular should be extended to the non-advised platform market – chiefly execution-only brokers like Hargreaves Lansdown – with a starting position that it will.
Overall, Mr Dymott says the RDR still has plenty of room to evolve with respect to the detail of the platform paper, especially as the consultation is still ongoing. “One of the things that we see, the challenges that we see, is the significant amount of detail that the FSA have to work through over the next few months to put that into final policy,” he says. “What we found with previous consultation processes on the RDR is that it took a significant amount of time due to the sheer complexity of some of the areas that they’re trying to tackle, and I think that’s going to be the theme.”
In spite of ongoing lobbying from the industry, however, Mr Thorman concludes that further consultation will make little difference to the FSA’s views. “Yes, they’ve consulted, but they just haven’t believed what people said. So unfortunately they have concluded we’ve got an axe to grind, and the best thing they can do is make their own judgement.”
Simona Stankovska is features writer at Investment Adviser