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Clarity case for fund firms over FSA’s plaform plans

Last week’s FSA’s platform paper settled a few issues – the distinction of their classification as an administration service and issues with regard to pricing, disclosure and re-registration.

However, there are still some key areas affecting advisers that need greater clarity, particularly with regards to the role of platforms as nominees and corporate actions within funds.

At the moment, fund platforms such as Cofunds and FundsNetwork, have a lot of paperwork on their hands dealing with the myriad and frequent corporate actions taken by the thousands of portfolios on their respective services.

With the difficult market conditions of recent times, the number of corporate actions, which include fund name changes, closures and mergers, has been on the rise. This led to more than 2,000 such events last year, according to the platforms. And it is not getting any better. According to FundsNetwork, in the past three months alone on the funds within its service, there have been 27 fund name changes, 44 objective changes, 61 other alterations to portfolio mandates such as those affecting charges and valuation points, plus nine fund closures, three mergers and 47 launches or provider changes.

Companies have always had to contact shareholders in such events but platforms have been increasingly taking on this role even though, as it currently stands, there is no requirement for them to do so. This is not a free, generous service platforms are undertaking – many levy an additional charge to companies for the service.

The inclusion of notifications in last week’s paper now makes nominee holders – including platforms, stockbrokers, Isa and Sipp providers – more responsible for contacting the end-investor. The FSA admits, it will not be without cost. But who will ultimately end up with the paperwork burden, how more “timely” communication can be enacted, the form of standardisation and at what cost are all issues that will to need to be resolved.

Under the proposals, nominees, now classified by the FSA as intermediate unitholders, must ensure investors receive the same information as they would if they had invested directly. These proposals extend to facilitating the exercising of voting rights.

The regulator has said these notifications must be made within a reasonable timescale, with the suggestion it should be the same as if the investor bought direct, in which case, for less consequential events, investors can be notified even after a change has taken place but when there are significant changes they must be given 60 days notice and then there are alterations which require a unitholder vote. In this case, intermediate unitholders will need to strengthen how they handle this area.

The FSA said: “Our information-gathering exercise identified inconsistency across platform operators in their treatment of voting rights. Some offered this facility in their terms and conditions but again there was not always clear disclosure. Where this service was offered, it was at additional cost. Some platforms stated they would vote on behalf of the unitholders.”

Which is why the regulator feels more action needs to be taken – that and a forthcoming European law may force the very changes the FSA is proposing.

The securities law directive is due for implementation in 2012 and it is expected to require all nominee companies either to pass on or facilitate the exercising of voting rights.

When the issue was brought up in the regulator’s earlier discussion paper, respondents pointed out that enabling voting rights would incur a cost and the FSA agrees. It said: “We do not expect end-investors to have to pay a direct charge for this service but we accept that administration fees may rise slightly to allow for firms’ additional costs.”

For one, there will be the cost of having the appropriate systems and controls in place either to exercise voting rights at the instruction of clients or to facilitate those rights.

Apparently, just sending an email redirecting investors to where the information is located will not be enough. The FSA will allow for email communication instead of postal notification and where the intermediate unitholder does not have the end-investor’s information, an adviser can be notified instead.

Gary Shaughnessy, managing director UK retail at Fidelity, said he does not anticipate the planned changes in this area will necessarily equate into higher charges but he does feel greater clarity is needed, such as who ultimately should be notified.

Fidelity has said it is talking with the FSA now to see if it is acceptable for advisers to act as a proxy with regard to voting rights. Their proposal is not to shove the workload over to the adviser but would, in fact, see the adviser take action on behalf of clients, leaving it up to them to decide what communication or vote is necessary.

Shaughnessy says the number of individual holdings across funds has risen in recent years, as have the sheer number of funds and the amount of corporate actions being taken which require notification or votes, He agrees that engagement of investors is important but he says that many have advisers and are likely to be happy for them to act on their behalf instead of being bombarded with reams of paper. Another area addressed in the platform paper that has been overwhelmed by the pricing issues has been the task involving re-registration. The FSA has said this will be a must for platforms and other nominee holders by the end of 2012 but how it will be handled and the cost have yet to be ironed out. For instance, some companies may allow re-reg by the deadline but only manually, which will impose costs on counterparties.

Overall, the proposals contained in the FSA paper look sure to at least bring a more transparent regime to the platform world. Differentials in pricing between providers present on the various platforms will be clear to everyone and even though those commercial arrangements may have had little or no impact on an adviser’s choice, transparency is no bad thing.

Shaughnessy believes the greater disclosure requirements will create a natural competitive tension that will be beneficial to the industry as a whole as it will improve the focus on quality and service.

He says: ” With such disclosure, advisers are better able to decide what they feel is good value for money. I think it is more likely to create downward pressure on fees than for shelf fees to rise.”

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