The Financial Conduct Authority states in most cases the move to clean unit classes will be accomplished by converting units.
Converting units involves replacing one unit with another of a different unit class. The alternative is switching, which involves cancelling one unit and issuing another.
According to the FCA, conversion will normally be more beneficial to the client than switching.
Under new regulations, switches to the clean version of the same fund may not have capital gains tax implications where the client receives only other units in exchange for the old units and sees the exchange as a single transaction.
However, the FCA states the client will incur the costs of the sale and purchase of units, and may be out of the market while the exchange takes place.
The FCA states it expects any authorised fund manager or platform undertaking the conversion of units to clean unit classes (and any firms providing advice to clients regarding conversions) to consider a number of points before proceeding.
The regulator states the conversion should be in the client’s best interests and points out this would normally be the case where the clean unit class is exactly the same as the pre-RDR class, with the only difference being the reduced annual management charge.
However, the FCA points out it is possible that this may not be the case if the reduced annual management charge, combined with any new platform charge (or other charges), will lead to an overall increase for clients.
It is also possible, depending on the charging structure, that some clients may be better off and some worse off.
To mitigate the risk that some clients may be worse off, the FCA states platforms should ensure in all cases that clients have sufficient notification of, and information on, the proposed conversion to enable them to seek advice or make an informed decision on whether to transfer their investments to another platform.
The notification should include information on whether there is likely to be an overall increase in charges for clients, as a result of the reduced AMC combined with the new platform charge (or other charges).
If a client objects to the conversion, the FCA states their investments can continue to be held in the bundled class, but payments from providers currently retained by the platform will, from 6 April 2016, need to be passed to the client in full in the form of small cash rebates or unit rebates.
If a nominee is not intending to offer clients the option of remaining in bundled classes and receiving unit rebates, the FCA states it should be made clear to the client that this is not an option open to them.
