Platform paper throws up important questions

The platform policy statement published earlier this year by the FCA (PS13/1) reinforced the original position of the FSA in its platform paper PS11/9 issued last year.

In summary, it will follow through with a ban on cash rebates (bar a de minimus amount of £1) from April 2014 and legacy business must be converted to an explicit platform charge by April 2016. Rebates in the form of units are permitted but will be less attractive due to HMRC’s decision to tax them.

The separate decision to require platforms to ‘flip’ adviser ongoing remuneration for legacy business pre-RDR to an adviser charge no later than April 2014 adds a further burden to firms.

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Currently, there is a huge amount of confusion as to how providers will react and what advisers should be doing in the best interests of their clients.

So how are advisers going to cope? Well, there are four key questions advisers need to be asking themselves:

Do I have to move all clients to clean share classes?

If you are transacting new business, my suggestion is to set it up on clean terms. This would save the administrative burden and potential costs of changing it in the future. If you have reviewed a client’s legacy position and arrived at the conclusion that the existing share class is still the most appropriate, you should have already considered the tax consequences and cost/benefits in arriving at this conclusion

What if the clean share class is more expensive than what the client is invested in currently?

In terms of pricing ‘clean’ versus ‘dirty’, you may still be able to get a better price for a share class with a rebate. Do not forget the tax charge on the rebate though, which needs to be considered.

If ultimately we determine that the clean share class is most suitable for a client, do we need signed client permissions to move a client’s holdings?

Yes, unless you have discretionary management permissions where this type of restructuring scope is covered. For those operating on an advisory basis this would be advice and you should explain to a client why you think their portfolio needs to be changed. The other option is to wait until the platforms make the decision for you. They may, at some point, decide to bulk switch clients to the clean share class options through automatic re-registration.

As yet we do not know how the platforms are going to transition clients. CGT will not arise where an investor exchanges shares (or units) in a scheme of “substantially the same value” and the scheme property and investor’s rights are unaltered. It is important not to confuse this with fund switching, where liabilities could be crystallised.

Firms should check with their platform providers to determine how they will be treating the conversion. For legacy business, firms may want to contact clients anyway, to take steps to put in place adviser-charging terms ahead of losing trail commission. What if the clean share class is not available?