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FCA bulk conversions paper: Where the regulator went wrong

Platforms and the Investment Management Association want clarity from the FCA on deciding whether to convert clients to clean share classes.

The FCA issued its guidance consultation on converting clients to post-RDR share classes last month, with the consultation closing last week.

The paper states: “A conversion should take place only if it is fair and in the client’s best interests…if this is not the case, and if a client is in any way disadvantaged by such a conversion, we would not expect that conversion to take place.”

The regulator also wants nominees to notify clients prior to any conversion, and to give client the option to object to any switch.

In its submission to the consultation, the IMA wants the regulator to clarify that fund managers will not be responsible for meeting the requirement to assess whether a conversion to clean is in the clients’ best interests. 

The IMA says: “Whether or not it (a conversion) is in the unit holder’s best interests is an issue for them and/or any adviser/nominee involved in the decision to convert, not the authorised fund manager.

“Although FCA rules give the unitholder the right to convert from one unit class to another, it is our view that, where the unitholder is acting as a nominee, this is limited to giving the instruction with the consent of the beneficial owner.  This would be in line with common law restrictions on what a nominee can do.  The draft guidance is less clear on this point than it could be.”

The trade body has also sought to clarify that communicating with clients to explain the benefits of converting to clean would not qualify as advice.

Money Marketing investigation earlier this month found clean funds can be more expensive than the bundled fund. Money Marketing also understands several fund managers are not making clean share classes available for some funds. 

In their submissions, platforms have argued the FCA should set the total expense ratio as a way of assessing client detriment through conversion, rather than the annual management charge.

The FCA paper says the regulator “would expect in most cases that the clean unit class would be exactly the same as the pre-RDR class, with the only difference being the reduced AMC. If this is not the case we would not expect the conversion to take place.”

Aviva says clients that may be charged more in an unbundled share price must be consulted individually and that “the impact on both AMC and TER must be considered at the point of conversion.”

It says that where the TER is equal or lower, there should be no need for client consultation before conversion. 

Axa Wealth Elevate argues plans from some platforms to bulk convert goes against the FCA’s guidelines on assessing consumer detriment.

Managing director David Thompson says: “The decision to force conversion appears at odds with the clarification from the regulator that the rebate to clients on legacy assets can continue and it is unclear where the authority for platforms to force this move comes from.

Fidelity FundsNetwork head Pat Shea says: “We noted in particular the guidance that investors should not be disadvantaged by conversions. There are still a meaningful number of new share classes where this would be the case so we believe it is most appropriate for advisers to work with their clients to determine when it would be best to transition to new share classes.”

Platforms including Standard Life, Alliance Trust Savings and Novia plan to bulk convert clients into clean share classes next year.

In its submission, Standard Life says: “We have already completed exercises to move customers out of old bundled pricing into rebate-free clean share classes on our Wrap and Fundzone platforms. We have put our customers’ interests at the heart of our decisions and considered the effect of the conversion before proceeding.”

Standard Life says it is also important to consider the client detriment where they are kept in old bundled units where prices are opaque, the amount of rebates are unstable and additional tax liabilities are incurred.

It adds client disadvantage may arise from operational problems relating to supporting both bundled and unbundled share classes within model portfolios. 

Tisa’s response to the consultation, reported by Money Marketing earlier this month, warns conversions to clean share classes have already taken place which may not be fully compliant with the FCA’s recent guidance.


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. I have not heard about any material savings for clients as a result of this largely futile exercise – only reams of confusing paper for clients and huge costs for fund managers, advisers & platforms – costs that will ultimately have to be recovered from where – o yes the poor clients! Is there any material net advantage to anyone? No! Another great job from the make work crew at Canary Wharf…the ones who were so busy with this they missed…fill in long list…sigh…

  2. This is turning into a complete mess. Everything thatthe regulator seems to do in the name of transparency and fairness is a farse. It costs a huge amount of money to do, nobody benefits and everyone pays. Why in the name of all that is merciful will they simply not admit to their catestrophic errors and be done with it. They keep saying they are not a price regulator but they would not expect to see clients disadvantaged by a higher price for clean and transparent share class. Dear God, give me a break. Who do these “Canarians” think is going to pay for this? There is nothing, nothing good has or will come out of this whole Platform debacle. It is a total disgrace and is fast becoming a text book definition of reckless “Doing something stupid, knowing it is stupid”. Can someone please point this out to the regulator because it seems they are simply thick as champ and cant see what it is doing.

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