WELCOME TO THE NO FUN DECADE WITH THE TOP CLASS WEDNESDAY UPDATE
So here we are, and here it is, and I hope you managed to mark the passing of midwinter in the way that makes most spiritual and cultural sense to you. I personally learned some interesting lessons about what happens the next day when you let an 8-year old stay up till 4.15am on Hogmanay. […]
THE TOP CLASS WEDNESDAY UPDATE ISN’T WINDING DOWN
So here we are, siblings. Crunch time. In 48 hours we will know what our immediate futures hold. Will it be shame, and regret for what we’ve just done and the dishonour we have brought on ourselves and our forebears? Or will we hold our heads high and forge proudly towards the sunset on Friday […]
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.
THE TOP CLASS WEDNESDAY UPDATE SAYS ONE WEEK TILL THE KIDS GO BACK TO SCHOOL
Oneweektilthekidsgobacktoschool Oneweektilthekidsgobacktoschool Oneweektilthekidsgobacktoschool Oneweektilthekidsgobacktoschool Not that it’s been a long summer or anything. Actually, it hasn’t. Time was that the financial industry would pack up and stop doing interesting things with all the enthusiasm of MPs heading off for a nice break with only about 10 weeks to go until the biggest constitutional shift in […]
THE TOP CLASS WEDNESDAY UPDATE RESUMES NORMAL SERVICE WHETHER YOU LIKE IT OR NOT
Hello again, it’s me back from a month away, and I’m disturbed to see that you all kept reading and engaging with the Top Class Wednesday Update at normal levels while I was away. How am I meant to promote deep feelings of inadequacy and worthlessness in my team if you’re all unfaithful like this? […]
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 […]
GET BACK TO WORK WITH THE TOP CLASS WEDNESDAY UPDATE
“Did you have a nice…?” “Yes, it was very…” “Seems a long time…” “Certainly does, ready for the next…” So that’s sorted that out, good to catch up. Now put your behind in the chair and do some work. You’ve got a lunchtime, I’ve got an Update and we might as well sit the two […]
TAKE BACK CONTROL WITH THE TOP CLASS WEDNESDAY UPDATE
One time, when on holiday with the lang kittens in a part of England that I can’t remember, we went to a forest park place called Bewilderwood. The back-story for this place was something to do with creatures who looked like people who were called Twiggles, and creatures who didn’t look so much like people […]
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.
CONSUMERS HAVE THEIR SAY ABOUT PLATFORMS
Weighing in at 91 pages and backed by a study of more than 3,000 platform users, the consumer research element of the FCA’s Investment Platforms Market Study (IPMS[1]) is a heavyweight. And while it doesn’t land many blows or produce anything particularly revelatory, NMG’s research provides a substantial body of qualitative and quantitative evidence around […]
