In the past two weeks, the FCA has clarified when cash rebates can be retained, including when a fund is transferred between platforms, and Hargreaves Lansdown has challenged HM Revenue & Customs on whether cash rebates should be taxable.
So that is really good news because as an adviser, if you transfer a client from one platform to another, with no change to the portfolio or terms, the rebate can be maintained.
The interesting thing is that I can’t think of many situations where that could happen. Usually a client is transferred from a ‘fund supermarket’ proposition to a ‘wrap’ proposition, that is, from a fund rebate model to an adviser charging model. That would, of course, end up with new terms and an agreement to pay the adviser a charge so any rebate/bundled share class would not survive beyond April 2014.
To maintain the bundled share class and rebate structure, a client would have to transfer from one bundled proposition to another bundled proposition with no changes to the portfolio. Why would any client want to do that and why would an adviser propose that? I struggle to think of any scenarios so the clarification is interesting, but rather academic.
So what about the tax challenge from Bristol? To be fair, it’s a brave man who says Hargreaves is wasting its time. Let’s face it, it hasn’t made many mistakes in the past and is clearly well advised, so let’s see. The issue is about whether the rebate is a return of the annual management charge or whether it is effectively a distribution from the fund. This is pretty arcane stuff and the tax experts and lawyers are likely to approach an orgasmic state arguing the technical details.
Interestingly, whereas one must presume that this is important to Hargreaves Lansdown (and therefore perhaps other direct-to-consumer businesses) it will have little impact on the rest of us.
Most platforms have started or are close to starting the conversion process. There is no advantage for a platform with advised assets to have bundled share classes.
It is a truism that all adviser charging business models involve ...err…advice… in other words, they have to be in the new clean share classes by April 2014. The conversion has started and it will all be done by the end of the fiscal year.
So what about unit rebates? One large organisation has built its business model on retaining bundled share classes and adopting unit rebates. The role of unit rebates is otherwise limited until, of course, further discounts to clean share classes emerge. I suppose there will be fund managers who refuse to introduce clean share classes but they will be in the very small minority and are likely to come under direct and immediate pressure come April 2014. If, conversely, the pressure is on platforms to have unit rebates then that is what they will do.
Back to transfers: the Tax Exempt Saving Association (Tisa) has established a group of industry representatives, which I chair, to facilitate the conversion process.
The main objectives are to develop a ‘best practice’ (with the objective of standardising and optimising the client outcome) and address the need for transfers and conversions to happen concurrently.
Along with the excellent work by TeX (Tisa Exchange), these groups will work in the interests of investors to ensure smooth and timely transfers and conversions.
Hugo Thorman is chief executive at Ascentric
