Platforms should not convert clients to clean-fee share classes where the cost to the client will increase and they must also offer clients an opt out before any transfer takes place, the Financial Conduct Authority has said.
In a guidance consultation published today (23 October), the regulator states that if clients would be disadvantaged by a conversion then it should not take place.
The paper explains: “...a conversion should take place only if it is fair and in the client’s best interests. 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.
“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.”
Yesterday (21 October) pension and wrap provider James Hay Partnership revealed that one in three clean funds are more expensive than their bundled counterparts. The firm added that it would keep clients in the bundled share class if it was cheaper than the clean alternative.
Wrap platform Nucleus has also said it will assess pricing before converting shares.
FTAdviser previously revealed that most lower-value investors will likely face rising costs if switching to clean-fee classes. The M&G Optimal Income fund, for example, costs 0.3 per cent more using a pre-existing clean-fee share class than a bundled counterpart.
The clean version of the Artemis High Income fund available through Cofunds was also more expensive than its bundled version, again due to a pre-existing share class yielding a higher fee for the manager than the bundled version.
Artemis’ sales director Tony Van Gool said the cost was higher with the clean fee share class because Artemis had previously been forced to accept a lower-margin payment of only 0.5 per cent on many funds in order to stay competitive.
In an analysis of 19 funds on the Cofunds platform following its clean share switch last year, FTAdviser found the clean fee share class was more expensive for lower-bracket investors in 18 of them.
Cofunds switched all clients to clean-fee share classes during 2012, and promising 3,000 such share classes being available by July 2013.
In today’s guidance the regulator also said platforms must give clients the option to opt out of the switch rather than simply bulk-converting all clients without giving them a say.
Several wrap platforms have previously announced plans to bulk-convert clients to clean share classes, including Novia, Ascentric and Alliance Trust.
Novia was set to begin conversions this month, and both Ascentric and Alliance Trust have written to advisers and clients informing them of the pending switch to clean share classes. Standard Life announced in August that it would begin conversions in November.
Under the new guidance, the firms will have to offer an opt out and then not transfer any clients that state they do not wish to be moved into the clean fee class.
In addition, the regulator clarified that simple act of telling a client a clean-fee share class exists does not constitute an advice event, nor does the conversion itself if it came as a result of the client being told the clean share class exists rather than being advised to switch.
Regarding advisers’ role in conversions, the FCA said: “While legacy payments to platform providers will come to an end in April 2016, advisers may wish to consider contacting platforms and product providers before this date to discuss the appropriate timing of conversions to clean classes for their clients.”
