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Re-reg and regulation

The thorny question of platform to platform re-registration, or rather the lack of it, is again attracting widespread commentary from many wrap providers.

The FSA has, in effect, raised the stakes with its requirement in its recent discussion paper FS08/01, Platforms and more principles-based regulation – feedback on DP07/2, that advisers inform consumers of any material constraints that might inhibit the transfer of the client’s assets in the future.

When read in conjunc-tion with the June 2007 factsheet, Platforms: using fund supermarkets and wraps, which required advisers to carry out periodic reviews of the ongoing suitability of platforms for any given client, the combined effect could be to create a significant regulatory brake on the growth of those platforms that are not able to offer re-registration facilities and to make them available in an efficient manner.

Presumably, the regulator would expect any adviser who finds, on conducting such a review, that the service is no longer the most suitable option, to take steps to move the customer’s investments to whatever they found to be more appropriate.

If a material constraint prevents an adviser acting in this way, presumably they need to at the very least to stop placing any new business with a platform where such constraints apply and possibly even consider removing any existing business.

There have been calls from many within the wrap industry for the FSA to intervene over the issue of re-registration and mandate a particular course of action. I believe those encouraging this approach are in danger of making a mistake that they may end up regretting.

If the FSA writes a set of rules on re-registration, they may not end up being everything that the advocates of such an approach would like. The role of a regulator is not just to design optimal operational processes for market participants as they also have a far wider remit.

I applaud the far more subtle approach that the regulator is taking in encouraging organisations to take a responsible approach.

Certainly, giving guidance that could require advisers to question the suitability of recommen-ding any organisations that cannot meet certain principles leaves more scope for the market to evolve responsibly.

I have spoken to many IFAs who are taking these issues seriously and reviewing those they do business with against such measures. In doing so, however, it is important to consider the medium to long-term nature of the investments being made and the fact that the market is taking steps to accelerate the speed at which such transactions can take place.

There seems to be something of a consensus in the market that it should be practical to have automated processes to address these issues in the next 18 months or so.

If this turns out to be the case, given that funds are unlikely to be a suitable vehicle for an investment with less than a five-year horizon, there would appear to be a case for careful consideration of platform providers rather than a blanket action to refrain from investing through them.

It is, however, somewhat concerning there have been repeated pronouncements on when these issues might be addressed and so far none of the expected dates has been achieved.

I am also concerned that since the FSA paper was published, we have seen a subtle repositioning of a number of organisations on this issue. Many are now saying publicly they can support platform to platform re-registration but are not going on to say that the capacity to do so in a paper-based environment is limited.

Again, I believe we are seeing platforms being less than candid when setting expectations in the adviser community. We still need to see more open disclosure of the practical times it will take to conduct a platform to platform re-registration and the volume of such transactions that any organisation can undertake.

David Dalton-Brown of Funds Network has recently been stressing how important it is for individual fund managers to make the necessary investment to support re-registration services. I would strongly endorse this view, having previously suggested this in this column on a number of occasions.

Given the increased regulatory focus on this issue, several adviser firms have been suggesting to me that they will be increasingly looking at the extent to which fund management groups have support in place for these processes when identifying those funds they will recommend to clients.

In my experience, there are many fund management groups which have not realised the potential impact that failure to support such services could have on both their ability to attract new funds and even to retain money already invested with them.

Now the FSA has put in place a requirement for advisers to review such issues and to disclose to clients where material constraints exist, even though sales staff within an adviser firm may want to recommend a fund manager.

If the compliance view is that that group is unable to meet the adviser’s regulatory obligations, the salesperson is likely to be overruled by compliance.

As was pointed out by one adviser at a meeting I attended recently, this will not just affect the amount of business placed via platforms but the overall volume of any investment funds arranged.

Few issues are more front and centre in advisers’ minds today than meeting their obligations to treat customers fairly. If, as David Dalton Brown has pointed out, there are fund managers that are failing to engage in re-registration processes, it is possible that advisers may find it necessary to write to all clients invested in such funds and disclose potential material constraints due to their lack of ability to support re-registration.

For example, if, because a fund manager was not prepared to support re-registration on to another platform, a client had to encash holdings in order to switch to a platform, that may make such a fund an obvious one to sell while reviewing a client’s portfolio in order to take advantage of the annual CGT allowance so it is not just the ability to attract new money that may be under threat.

By subtly requiring advisers to review such issues, the FSA is creating an environment where it is in the interests of fund managers to prioritise support for re-registration processes.

Any such organisations that fail to do so are likely to find advisers’ compliance departments removing them from approved provider lists until such time as they can.

It may be time for fund managers that think there is no business case for implementing such changes to seriously reconsider their position.


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