THE TOP CLASS WEDNESDAY UPDATE IS THINKING ABOUT THE IMPORTANT STUFF
It’s been getting on for 4.5 years since I joined the lang cat and still I get caught out by some of the differences between England and Scotland. Not the obvious things, like weather or length of tenure in major sporting events, but smaller details like holidays. So, while England is head down hard at […]
Mental health awareness is for life, not just for #WorldMentalHealthDay
Regular visitors to the lang cat will know that we are keen to encourage people to talk about mental health. Many would agree that working in financial services can be stressful. The competitive environment and performance expectations can lead to long hours, poor work life balance and a “work hard / play hard” culture. Confessing […]
THE SEARCH FOR VALUE
Amidst absolutely no fanfare whatsoever 30th September saw the implementation of one of the main changes as a result of the FCA’s Asset Management Market Study. Over two years since the final report and getting on for 4 years since the terms of reference was issued, it’s fair to say it’s not been a speedy process, but finally, some of the biggest changes coming out of this study are finally live.
So, what has actually happened? All the new rules can be found in PS18-08 (itself published in April 18..), and centre around the issue of value for money. As of now, Authorised Fund Managers (AFMs) must publish a statement setting out a description of the assessment of value, either in the fund’s annual report or in a separate report. In either case, the statement must be published within 4 months of the end of the relevant annual accounting period. No big bang implementation, but these reports need to be published over the coming months. Value for money is subjective, however this is the criteria these reports need to assess….
1: Quality of service
The range and quality of services provided to unitholders.
2: Performance
The performance of the scheme, after deduction of all payments out of scheme property as set out in the prospectus. Performance should be considered over an appropriate timescale having regard to the scheme’s investment objectives, policy and strategy.
3: AFM costs – general
In relation to each charge, the cost of providing the service to which the charge relates, and when money is paid directly to associates or external parties, the cost is the amount paid to that person.
4: Economies of scale
Whether the AFM is able to achieve savings and benefits from economies of scale, relating to the direct and indirect costs of managing the scheme property and taking into account the value of the scheme property and whether it has grown or contracted in size as a result of the sale and redemption of units.
5: Comparable market rates
In relation to each service, the market rate for any comparable service provided:
(a) by the AFM; or
(b) to the AFM or on its behalf, including by a person to which any aspect of the scheme’s management has been delegated.
6: Comparable services
In relation to each separate charge, the AFM’s charges and those of its associates for comparable services provided to clients, including for institutional mandates of a comparable size and having similar investment objectives and policies;
7: Classes of units
Whether it is appropriate for unitholders to hold units in classes subject to higher charges than those applying to other classes of the same scheme with substantially similar rights.
COLL 6.6.20R (Assessment of value).
In addition to the above, over the next 18 months the AFM board will need to appoint two Independent Non-Exec Directors. And they will be covered by the Senior Managers Regime. This should focus the mind, especially for some of the potentially trickier points (4, 5, 6 & 7) above. Hands up if you’d fancy signing off, under SMCR, that your charges represent value for money relative to comparable services? For some funds this could be a difficult discussion…
Now, it’s very early days for this, and repeating the point made above there was never going to be a big bang implementation. These reports will be published as and when over the next 12 months. Having said that, the silence has been deafening. No material from the FCA to promote these changes, and especially to highlight what (if any) role advisers need to play. Should advisers be using these reports as part of their research and due diligence process? No one knows…
And surprise surprise there is no evidence (based on my google skilz) of fund groups publishing any material relating to these changes. Naively I had expected at least one fund manager to go early with these changes and take the moral high ground (“We’ve always strived to deliver VFM, so here we are…”) but as far as I can tell no one has. Move on please, nothing to see here as the .gif says
But despite the silence, this still feels like a huge change. The combination of the new rules, the reasonably prescriptive content of the reports, and the step change in internal governance should be a powerful one. So much so we’ve decided to devote the entire afternoon of our annual DeadX event on this very topic. We’ve lined up a great range of guest speakers all of whom will get into the detail of what value for money means for asset managers, advisers, platforms, NEDs and most importantly, customers. You can find full details at https://www.langcatlive.co.uk/ – over half the tickets are already sold, so don’t hang around. We’d love to see you there.
What next for SJP and exit fees?
Over the last few weeks you can’t have failed to notice that The Sunday Times has been giving St James Place a good shoeing. Luxury cruises, opaque fees, leaked phone calls….the hits keep on coming. It’s not been a good month for whoever does SJP’s PR.
One area that has come under criticism (again) is the question of their “exit fees”, or “early withdrawal fees” as they describe them. The Sunday Times (15th September) states “SJP believes the City watchdog wants it to scrap early withdrawal charges on pensions and bonds, and thinks the firm sails “close to the edge” of regulations”.
As luck would have it, the subject of exit fees is something the FCA is currently pondering. The Investment Platform Market Study final report was published earlier this year, with a supporting consultation paper carrying a “discussion chapter” on exit fees. The consultation closed in June, with the paper stating: “For the discussion on exit fees, we will consider responses to the questions and may issue a formal consultation later in the year.”
So, here we are mid-September, everyone is back at work and school, and there isn’t much left of “later in the year”, so what can we expect in response?
Essentially, the FCA has two options:
It proceeds with a ban on exit fees, or
It backtracks and decides a ban isn’t necessary.
I think it would be very unusual for the regulator to make a u-turn at this stage of the process, not least since it recently came under Parliamentary scrutiny for lack of action. So I’m going for 1; there will be some sort of ban.
This is where things get interesting for SJP watchers.
The consultation proposes a ban for Platform Service Operators, which means Life Company models such as SJP would not be covered. However, the FCA recognise this, and has asked the following killer questions within the consultation: 1
“If we introduce a ban or cap on exit fees, should it apply to firms offering comparable services? If not, what are the reasons why a ban/cap should or should not apply to particular types of firm or service?”
“If your firm is a product manufacturer as well as a distributor as defined, what exit fees are applied within the products and services you offer to clients? If such fees exist, please provide a rationale for this charging model.”
“How prevalent are cases where product-related exit fees pose a similar or greater barrier to switching in the investment platforms and comparable services market?”
If there is to be a ban on exit fees, then it’s far from certain who it will cover. If it is just for Platform Service Operators the platforms impacted will argue (with some justification) about the unfair playing field this creates. However, if the FCA grasp the nettle and read across to Life Company models, what about other charges that look and quack like an exit fee? For example early encashment fees where an enhanced initial allocation was paid. Market Value Reductions (which of course aren’t exit fees, but have a whiff of them) on With Profits might even come into the spotlight.
This really is a complex area and the best outcome is not clear.
If the FCA’s deadline of responding to the consultation by “the end of the year” is to be believed, the regulator will currently be sifting through the industry responses to those exit-fee killer questions. Those responses, and perhaps the regulator’s choice of Sunday reading, might well define the next chapter in the SJP story.
[1]. Source https://www.fca.org.uk/publication/consultation/cp19-12.pdf
HMRC take HL to the (super)cleaners
Summer holidays are always a good time to bury good news, and as I glanced at my iphone from my hotel pool lounger the other week this piece caught my attention. I was on all-inclusive mind, so I quickly went back to another mojito, but now we (me) are all back at work, it’s certainly […]
TOP CLASS WEDNESDAY UPDATE DOESN’T STOP FOR A NEW PRIME MINISTER
No doubt we’ve all heard quite enough about that particular tale, so let’s not linger. Right, as the boss continues basking on foreign shores, it’s my turn to keep his metaphorical chair warm. FAIR HAS TO BE FAIR FOR ALL Treating customers fairly is, happily, firmly embedded in the industry. It sits quietly in the […]
THE TOP CLASS WEDNESDAY UPDATE DON’T LIKE CRICKET, OH NO, IT LOVES IT
Week two of the boss man’s holiday is normally when he finally switches off, and radio silence is maintained. I last saw/heard from him 5 days ago via Strava, heading off for a walk in 32-degree temperatures. I’ll give it a couple more weeks before I send for a search party. Anyway, on to the […]
THE TOP CLASS WEDNESDAY UPDATE NEVER TAKES A HOLIDAY…
If you are a regular reader of this email, boy did you get a classic end of season cliff-hanger at the end of last week’s episode. The boss has gone off on his hols, tossing the keys to the TCWU machine in the direction of his drones from sector 7g. Will the update be sent? […]
BREXIT, GAME OF THRONES, AND THE INVESTMENT PLATFORMS MARKET STUDY. AND YOU.
As fans of a good box set will tell you, the trick is to keep the audience wanting more, but also to deliver enough excitement to keep them interested in the here and now. This is, I think, exactly what the government is doing with the Brexit parliamentary process, which appears to be somewhere between The Hunger Games, the Red Wedding scene from Game of Thrones and House of Cards.
Over recent years, the FCA’s competition arm (a kinder, gentler type of regulation) has knocked out a couple of pieces of work that, whilst they might not be at Game of Thrones levels of violence, certainly deserve your full attention.
First up we had the Asset Management Market Study. Jump back in our blog time-machine to 2017 if you fancy reading up on that one. Following on from that came the Investment Platform Market Study, and this morning we were treated to the final report.
First thing to note, as we have always said with these papers, is that these are competition studies. As well as supervising markets, the FCA now has a mandate to ensure they are operating effectively from a competitive point of view. A more competitive market leads to better outcomes, or at least that’s the theory. As such, anyone expecting huge disruptive changes to the platform market, then, a) hasn’t been paying attention to the earlier work, and b) will be very disappointed.
HERE’S THE SUMMARY BIT
So, what actually happened today? The FCA published two papers – a final report (more on that in a bit) and a consultation paper. It is the CP that contains the proposed changes, and in one case a bit of controversy…
First up in the CP are proposed rules to force the ceding platform to make it easier for clients to re-register to another provider. This is especially relevant where the platform holds a discounted (“superclean”) share class that the other provider might not have access to. In these instances it will be up to the ceding platform to convert the client, free of charge into a share class that can be re-registered. The CP has a few questions about this, and there are complexities to be worked through, however the FCA are proposing draft handbook text and an implementation date of 31st July 2020, so it’s clear they are expecting this one to happen.
The other part of the CP looks at exit fees. By now you will have seen all the headlines stating “FCA propose ban on platform exit fees”, and whilst this is certainly its proposal it doesn’t appear to be a done deal just yet. Compared to the share class proposal above, where there are final rules and an implementation date, the consultation for exit fees is still posing questions that feel more open to discussion. “If we introduce a ban on exit fees…” “To what extent might a ban mitigate barriers to switching?” To us, this sounds like there is still a debate to be had.
Central to this will be any potential read across to adjacent markets, and the CP doesn’t shy away from this. In theory they could have said that the IPMS was only looking at platforms and left it at that, but they have grasped the nettle of what a platform exit fee ban might mean for other similar services, not only asking “If we introduce a ban or cap on exit fees, should it apply to firms offering comparable services” but also “If your firm is a product manufacturer as well as a distributor as defined, what exit fees are applied within the products and services you offer to clients? If such fees exist, please provide a rationale for this charging model.“
For a number of VI models, whilst not currently directly in scope for any change, it is clear the FCA is recognising that a ban in platform land has the potential to create an uneven playing field, and more importantly, be very confusing for investors if it doesn’t apply to everyone. It will be fascinating to see how this consultation plays out, and we would urge anyone with strong views either way to participate.
AND HERE’S THE REALITY CHECK
As tempting as it is to criticise the regulator for lack of action, realistically this is the only course it could take. It was never going to wade in and, for example, announce a ban on exit fees for life companies and all your favourite VI firms. You only need to cast your mind back to the “closed book blunder” to see just how badly this could have ended up. The only alternative would have been to duck the issue, and only implement a ban for platforms.
As regards exit fees themselves, the FCA was always going to ban them. The supporting consumer research shows a clear group of consumers for whom this will benefit. In our view exit fees are increasingly feeling like a relic from the past. There is just about still safety in numbers with several large providers having them in place, however this is something we expect to change fairly rapidly as firms decide to take the moral high ground and change their pricing accordingly. The sooner exit fees are consigned to history the better. If you’re a platform with these fees reading this and thinking ‘phew, we can keep them in a while longer’, then you should have a word with yourself and do the right thing before you’re made to.
Elsewhere, everything else you might have read about or thought would be included in the potential changes (orphan clients, advice process for moving platforms, cash on platforms etc) has been kicked into the long grass via the final report, although there are a number of repeated reminders that firms need to be compliant with loads of boring existing regulation such as inducements, disclosure, PROD and even in one reference, competition law. This is probably the one area where the report is lacking – if the FCA sees issues with non-compliance to existing rules it should take action.
And the next episode? Several mentions of an imminent “RDR and FAMR review”. There’s no scope for this yet, but it looks like it could be an epic, not only looking at advice, but also model portfolios and relationships between advisers and DFMs. I for one can’t wait
Finally, a note to our insight subscribers. We will be hosting a webinar next week to share more of our thoughts. Details will be circulated in the next few days.
MIFID II – HOW? WOW?
MIFID II – HOW? WOW?
Yesterday I had the pleasure of taking part in the latest Paraplanner Howwow; a fun packed hour (no, really) discussing MIFID II costs and charges disclosure with Richard Allum and Benjamin Fabi. If you missed it live you can catch up at your leisure here https://www.crowdcast.io/e/howwow-jan19
If you’ve never seen a Howwow before, you’re missing out. Richard has quietly built a hugely impressive community of geeks professionals who really want to engage in the nitty-gritty detail. The driving purpose of this group is to share best practice and help the industry improve how it goes about things, to provide better customer experiences. I really admire them and always learn a huge amount whenever I’m with them.
Yesterday was no exception. The full hour was devoted to looking at how platforms, but more importantly paraplanners and advisers, are approaching the imminent MIFID II ex-post reporting. If you haven’t seen our research on this already (where have you been!), jump back a week to see what we are talking about and then come back here once you are up to speed. Also, it’s worth noting that Transact has supplied its answers to our research, so we’re now covering 16 platforms. (thanks Transact!).
*STOP THE PRESSES – Big thanks to Fundsnetwork as it has also now supplied answers. We’ll include them asap.*
So, what were the main conclusions from the webinar?
Firstly, the audience gave a big thumbs up to the platforms (that represent the vast majority of the industry) who have helped us compile this research. The steps they are taking to be transparent with their plans is hugely helpful to advisers and paraplanners.
At the top of our wish list sits the need for additional detailed information on the calculation methodologies being used in the various reports. Some providers are using the approach recommended by TISA in their 2017 guidance, however a number appear to be adopting different methodologies. We reckon it would be extremely helpful if platforms could produce a guide for advisers/paraplanners setting out exactly how the figures are sourced and calculated.
These guides would help (but not solve) what is likely to be the biggest problem for paraplanners and advisers. We had several questions along the lines of “what can advisers do if we have a client with assets across a few platforms, direct with a DFM, maybe a bit of EIS on the side?”. The answer is that no-one knows, so it’s likely to be a very difficult exercise to communicate all this stuff consistently and transparently. Good luck.
There was some debate about whether the fact platforms are sending statements directly to the client is enough for advisers to be compliant. Honestly, we don’t really know. However, even if adviser firms are comfortable that is the case, if clients have assets across more than one provider, advisers are almost certainly going to need to do something to meet their own regulatory responsibilities. Remember the whole COBs bit about “clear, fair and not misleading”. That’s still A Thing.
FCA rules in this respect are reasonably clear, however it’s obvious, to us at least, there is a need for good and poor practice examples to be shared amongst the advice community. We would encourage the regulator to do exactly that and would equally encourage platforms and other providers to carry on giving advisers and paraplanners the support they need.
