Regulatory changes, distribution pricing negotiations and record asset drops from market conditions are all colliding at the same time. For intermediaries and their clients, this may mean higher charges on funds than the typical 1.5 per cent AMCs that are the industry norm.
The raging debate between product providers and platform Cofunds over a rate hike is just one area where providers feel they are being squeezed. One of the concerns about the rate hike proposal is the knock-on effect it could have on pricing arrangements with other platforms and distributors.
At the same time, other platforms are adding fees for things that in the past were complimentary, such as corporate actions. Fidelity FundsNetwork has been signing firms on to the idea it will now charge for any corporate action on any fund that leads the platform to have to contact shareholders.
Cofunds is also charging for this now and Standard Life is said to be contacting groups to ensure that any corporate action requests are at least standardised. Corporate actions, which include fund name changes, closures and mergers, used to be small but difficult market conditions and increased M&A activity has led to a sharp increase in this area, heading north of 2,000 such events a year.
The price for corporate actions is said to relate to how many registered shareholders a platform has to contact, meaning a simple fund merger between two funds could cost a group thousands depending on the number of its investor base. However, Fidelity head of UK retail Peter Hicks says corporate action charges are really a recovery cost rather than a new fee. Groups have always had to contact shareholders, so the cost has existed.
Corporate action fees tend to be charged per shareholder in a fund, generally less than £1 per person but they only relate to the registered shareholders with any one distributor. For example, if fund XYZ had 1,000 shareholders via platform A and 2,000 on platform B then it would be a set fee on each platform for notification to those shareholders as opposed to each platform charging them a fee for the full 3,000 shareholders.
No matter what way it is cut, corporate actions, sprung from fund rationalisations during a difficult market climate, costs groups but they could recover some of that through the affected funds themselves if the provider chose to do so.
Through Oeics, which make up the vast majority of open-ended funds in the UK retail area, certain costs can be attributed to the fund itself. Notoriously, some providers in the past have set the cost of appearing on a fund platform to the fund itself, so applying corporate action charges to a portfolio would hardly be a new concept.
Another growing pressure on fund charges is the numerous forthcoming regulatory changes. The EU’s alternative investment funds directive could force companies to switch non-Ucits funds over to an Ucits structure, causing restructuring costs. However, the biggest cost implication from changing regulations is coming from the FSA’s retail distribution review. The RDR is already feared to have huge cost implications for intermediaries but providers are hardly unscathed by the new regime.
Under the RDR, trail commission arrangements will have to end in 2012 but those already in place at that time will be allowed to continue. This, along with accommodating the myriad of adviser charging structures, is just some of the issues that will cause providers to have to add multiple share classes to funds – again incurring higher costs.
Speaking at a recent Tisa conference on the RDR, Beachcroft Regulatory Consulting managing director Richard Hobbs said that fund managers will have a number of outlays imposed by the regulation, many of which are not even clear yet.
The needed system/admin changes required to contend with some of the added rules under the RDR, as well as the implementation of new systems to deal with direct instructions looks expensive, he said.
One uncertainty that providers are already dealing with in regard to RDR is how distribution platforms such as Cofunds and FundsNetwork will be tackled.
Originally, it was expected that there would be a separate FSA paper on the RDR and platforms but many now believe this will not be forthcoming.
Instead, the industry expects the RDR rules as they apply to intermediaries will also apply to the platforms. But, as Hicks said, this would hardly clear up anything for providers. Questions such as whether fees to platforms will constitute a service or a commission and whether or not guided architecture on such a service would make a platform a distributor need greater FSA guidance.
Clarity on these issues is even more important now, rather than down the road, as groups are currently in pricing negotiations with platforms.
It is hard for a provider to make a decision with regard to commercial arrangements with a distribution platform, when how that service will be treated under the RDR is not remotely settled.
For example, one argument could be that if platforms have to conform to the same rules as the definition of independent advisers, then providers could have greater negotiating power. Advisers seeking whole of market platforms will have less time or use for platforms where the coverage of products and even funds is patchy, giving power to groups.
Regardless of which way it turns out, the uncertainty of even a couple of months down the road does not help providers currently hammering out deals with platforms today. For instance, it is understood that companies only have to October 1 to sign up to the new, higher-fee Cofunds’ deal.
Hicks said it is almost a perfect storm of factors coming together from all sides to put pressure on costs, although he is not convinced it will necessarily lead to higher fund charges or total expense ratios.
With increased transparency under the RDR, Hicks pointed out that lower-cost funds may have a greater advantage.