Platforms and adviser firms risk creating “complexity and overhead” for clients by not switching fully to clean share classes following the regulator’s move to ban platform cash rebates, David Tiller, head of platform propositions at Standard Life, claims..
Speaking to FTAdviser, Mr Tiller, whose firm completed the bulk conversion of the majority of funds on its platform this week, highlighted that platforms have “responded quite differently” to the rebate ban, with some opting to convert on a case-by-case basis and leave the ultimate client decision up to advisers.
Financial Conduct Authority rules require all new business to be placed in cash-rebate free share classes from April 2014. Legacy business can continue until April 2016 and platforms can continue to facilitate discounts through unit rebates.
The FCA has stated that conversion to clean share classes must not take place if there is a risk of detriment to the client, with platforms required to either leave the decision on conversion to advisers or to offer them at the least a time-limited opt-out from any conversion.
Mr Tiller said those platforms not bulk converting will continue to face regulatory disruption, as the costs involved in building rebate tax collection and other functionality will be wasted as clean shares eventually come to replace pre-Retail Distribution Review alternatives.
He said: “One group of platforms have built or are building unit rebating, rebate tax collection and reporting functionality and require advisers to self-manage the conversion to clean funds. The other group are converting or have converted to clean themselves.
“Platforms that have built unit rebating and tax collection will waste this sunk cost if they convert to clean. But the reality is current behaviours are being driven by past decisions. The route each platform is taking depends rather more on its starting point than the end destination.
“Where platforms have legacy tranches or are funding the platform fee from the fund rebate they have more to unpick. Similarly, platforms that have worked with advisers to aid the adoption of adviser charging will find the transition to clean far easier.”
Mr Tiller said advisers, too, would face continuing issues if they failed to convert clients wholly to clean share classes, with a blend of share classes in a portfolio creating “complexity and overhead”.
“Adviser businesses need clear plans for converting clients and funds to clean given the disruption to their central investment proposition processes and the potential for TCF issues and errors. The coexistence of legacy pre-RDR share classes and clean share classes in client portfolios creates complexity and overhead.”
Standard Life was criticsed earlier this year when it emerged that 968 of 1,895 funds on its platform were more expensive in their unbundled form.
Standard Life hit back by saying this was the result of fund managers taking bigger margins and said it would be negotiating preferential share classes to replicate the discounts that were included in the bunbled versions, with the majority set to be in place by the end of Q1 2014.
It added that the costs of clean share classes did not take into account the income tax charge that must now be paid on rebates, which would make the disparity far smaller than headline prices suggest.
According to Mr Tiller, many platforms are currently not following the strategy they would really like to as it now much more about what they can commercially and operationally support.
He said: “Of course, the greatest pressure is financial. The much promoted ‘platform price war’ is unlikely to happen – largely because platforms still require significant on-going investment to meet the demands of regulation, capital adequacy and advisers.”
Like many platforms, Mr Tiller said ‘superclean’ dominated 2013, adding that some platforms rallied against these sorts of fund discounts but ended up asking for them themselves.
He said: “Often portrayed as the stuff of smoke-filled rooms, in reality platforms are rightly concerned with ensuring the enhanced terms clients could receive via extra rebates are carried through to a clean pricing environment.
“Given that discounting is a feature of any healthy retail market, I expect the controversy to fade in 2014 as the concept of ‘total cost of ownership’ takes hold.”
