Time is slipping away before providers must adapt to meet the requirements laid out by the Financial Conduct Authority (FCA).
The regulator banned all payments between fund managers and platforms on new business under the PS13/1 statement in April last year, with a sunset clause to phase out payment on legacy business leading up to the April 2016 deadline.
From that date, those using platforms will no longer be able to collect a trail commission for their services. Advisers have 17 months to transfer advised platform clients to an adviser charging structure or have their trail shut off, with clients turning into “orphan clients” – consumers who require financial advice but who are unable or unwilling to pay for it.
Platform service providers have not been able to retain rebates on new business since
5 April 2014, and will be banned from doing so on legacy business from April 2016. A sunset clause was established to phase out these rebates on legacy business over two years leading up to the deadline. Payments between fund managers and platforms have been banned since April 2013, as have cash rebates.
However, trail commission can continue on ‘undisturbed’ collective retirement account (CRA) and collective investment bond (CIB) business beyond 6 April 2016 as they are not affected by the rules contained within the FCA’s PS13/1 guidelines.
Around 80 per cent of intermediaries believe that some advisers will find the transition from commission to fee-based charging structures before the sunset clause deadline to be difficult, according to recent research by Investec.
Key reasons behind the difficulty cited by respondents to the survey included failing to change their business model, fear of losing clients and revenue, administrative inefficiency, and advisers waiting for providers to stop trail commission entirely before making the transition.
Platform preparations
As the 2016 deadline draws near, some providers are getting an early start on the transformation to RDR-compliant charging structures.
Hamid Nawaz-Khan, chief executive of Alltrust, which specialises in the provision of actuarial, trustee and administration services for self-invested personal pensions (Sipps) and small self administered schemes (Ssas), says, “Alltrust has always operated in RDR-compliant fashion and hence, apart from minor tinkering, we have not had much to do. We view the changes as positive and believe that it will be very good for the credibility and integrity of the industry.”
In an unbundled or clean fund share class, any previously available rebate is removed from the bare fund annual management charge (AMC) and all charges must be explicitly stated. This is in contrast to a bundled fund share class, in which ongoing charges are bundled up within the AMC of the selected funds. Bundled share classes can include initial fund and switch charges, while unbundled do not.
Bulk transitions away from legacy bundled share classes well ahead of the deadline will help providers to ensure that they are unbundled well before the new rules come into full effect.
Standard Life moved all its clients to clean share classes in late 2013 when the firm moved all assets on its platform to an unbundled share class. Less than 1 per cent of assets on the platform were unable to make the change as some fund management firms did not offer an unbundled share price on certain funds, or are making the transition at a later date.
Backed by the Royal London Group, Ascentric aims to help advisers adjust to the changes contained in RDR through its independent wrap platform that includes investment and tax wrapper market coverage, transparent charging, financial planning tools, a reporting suite, and an integrated fund supermarket, stockbroking and cash management solutions.
Ascentric’s RDR-compliant platform has annual charges of £60 plus 0.15 per cent for funds up to £60,000, 0.25 per cent on balances between £60,000 to £1m, 0.1 per cent on balances between £1m and £3m, and greater discounts on balances over £3m. There are trading charges of £12.50 per electronic deal and £20 for non-electronic, which are discounted in model portfolio arrangements.
Old Mutual stated that 74 per cent of its book overall is now fee-based, with 57 per cent of advisers fully unbundled. Of its Isa and collective investment account book, 77 per cent have moved away from commission.
By April 2016, in line with current rules of PS13/1, Old Mutual says it will be working closely with advisers to transition any remaining collective investment accounts (CIAs) and Isas business that has not already moved to their reinvestment charging basis, whether by a platform transaction or by client agreement.
Following discussions with adviser firms, Fidelity’s FundsNetwork developed an approach to help advisers transfer their clients to clean share classes ahead of the April 2016 deadline.
FundsNetwork launched an enhanced switching functionality earlier in 2014, which is available for use with Isas and investment fund accounts. The switching service includes a ‘make me clean’ function, which allows advisers to move bundles of closed funds within client accounts to the equivalent clean share class. The tool allows advisers to perform multiple switches within an account and on more than one account at the same time.
Jon Everill, head of advisory services at the platform, says, “FundsNetwork is also offering a voluntary conversion event, where firms can provide names of clients that they wish to move to clean share classes, prior to a conversion event for those nominated in the first quarter of 2015.
“In order to ensure firms are fully compliant with regulations, FundsNetwork will look to convert any remaining platform clients to unbundled share classes before the April 2016 deadline. However, FundsNetwork will not undertake any mandatory conversions until at least the fourth quarter of 2015.”
All platforms open to new investments on Alliance Trust’s platforms are clean, meaning that they do not pay a rebate but the fund typically has a lower annual management charge. Funds recently added to the platform include GAM and Royal London, Sinfonia, TwentyFour, Woodford, Santander, and Canada Life.
The role of legacy
Commission payments from many fund groups to platforms are likely to persist after April 2016, although platforms cannot retain this commission.
Hargreaves Lansdown already rebates the vast majority of this commission to the client in the form of a loyalty bonus. Following the April 2016 deadline, the company has said it will rebate any and all commissions received from fund groups to clients.
Following 5 April 2016 rebates to platforms on legacy business must end, although rebates from fund managers to clients are permitted to continue. These rebates, however, are often part of a package deal, so it is likely that trail commission on legacy platform assets will also cease in most cases once the platform rebate sunset clause comes into effect.
End of an era
Mr Nawaz-Khan says, “It may very well be the case that trails will come to an end, although I do not see why this will happen in all cases since not all packages are the same. The industry has, however, always been very inventive with this way of remunerating advisers and I am sure that solutions will be found which will suit all parties.”
It is not possible to pay trail commission via ‘clean’ share classes and so this option will not be available for advisers post April 2016. Rebates, however, will continue to be paid to clients in clean share classes, where discounts apply, in the form of units.
Mr Everill says, “While rebates are taxable, depending on the product wrapper and client circumstances, they still represent extra value after tax to clients and should therefore continue to be processed where possible.”
Many believe that few clients would still be left with legacy assets by April 2016, irrespective of a sunset clause.
Mr Nawaz-Khan says, “Regrettably this is bound to happen because not all clients and advisers will review all investments and hence legacy effect will persist. There is a need to educate the public so that they may instigate the reviews.”
