The image of a sunset is usually best encapsulated by a beautiful beach view or a desert landscape.
However, a sunset clause, although potentially equally dramatic, is unlikely to be as aesthetically pleasing. Instead, it is likely to be similar to the final scene in Thelma & Louise – the one where they drive off into a beautiful sunset… then straight off the edge of a cliff.
The sunset clause introduced in April’s Financial Conduct Authority (FCA) platform policy paper was possibly the one surprise for the industry. Platforms now have until April 2014 to apply the new rules to new business and then two years to ensure the same rules apply to legacy business.
This will require platforms to explicitly charge for their services and no longer pay cash rebates. Although this seems reasonably straightforward, there are some significant issues for advisers.
Firstly, some good news. There is nothing in the rules to ban trail commission to advisers. The FCA has only banned platforms retaining a fee post-April 2016. However, they can collect a rebate to be paid to an investor, in the form of units or as a commission where eligible.
But, using an example, this situation may not be as positive as it first seems. Take a fund paying 50 basis points (bps) commission and 25bps platform fee, with a total charge of 150bps. At some point, between 2014 and 2016, the platform charge will need to be explicitly collected. This will mean that if the client stays in the same fund the 25bps fee would need to be rebated to the client in the form of units and then charged explicitly.
Following the recent HMRC clarification, that same 25bps will now be taxable if held outside an Isa or pension, increasing client cost. While the FCA has not banned commission post-2016, it has developed a policy that will create challenges for advisers.
As an alternative, fund managers could launch share classes that are priced to include an allowance for commission, but exclude the platform fee. In the example above, this would see the introduction of a 125bps share class. But this seems to be counter the direction of travel.
Therefore, the answer inevitably leads to ‘unbundled’ share classes, which carry no rebates or distribution fees. This requires advisers to move their business to adviser charging in line with the platform rules. It will also require platforms to facilitate the conversion between new share classes.
This leads to the challenge of migration. At some point platforms are going to need to switch clients across. This will impact advisers by either putting clients into a less tax-efficient structure or turning off commission without an adviser charge in place.
To make this work effectively, we believe the FCA should consider allowing customers to be migrated in bulk to new charging structures and share classes, and logically that should include adviser charging. To make this work, this would be on an ‘opt out’ rather than an ‘opt in’ basis. The FCA has said it will issue formal guidance on this process. This is critical and is a key focus for the industry – without it, this process risks being more Thelma & Louise than a beautiful sunset.
Ed Dymott is head of business development at Fidelity Worldwide Investment
