FCA closes in on value challenge for share class conversions

By Ben Cocks

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Nov 28, 2019
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ben cocksEver since the terms ‘clean’ and ‘super-clean’ first appeared in the run up to RDR, the industry has been debating the conversions challenge.

It is increasingly common for platforms to negotiate discounts on fund charges for their customers, and that discount will often be provided in the form of a new share class with lower annual fees.

Competition versus hidden charges

The FCA sees this as a sign of healthy competition in the market, but the customer may not always benefit from that competition because the cost or risk of accessing those new share classes can be prohibitive.

If an investor has an existing investment in a fund but must sell it and then rebuy a newly available share class in the same fund, the downsides are likely to outweigh the benefit of any discount. They will be out of the market briefly, which in these volatile times could be costly. On a unit trust, they would suffer a loss on the bid-offer spread, and on an Oeic – if they were unlucky – they might lose out on an adversely swinging single price. They might also suffer a capital gains trust hit on unwrapped funds.

Conversion vexations

And there could be worse to come. If they were to switch to the new discounted share class and then sometime later decided to transfer to a different platform for a better deal or some new features, it is unlikely they would be able to transfer the holding in specie.

The new platform might not hold this particular discounted share class and may even offer some other – possibly even better value – share class.

There are platforms that say that in some cases they can arrange the necessary conversions, but far more often than not the holding is sold at the old platform and rebought at the new platform. This means another short period out of the market and another potential loss on trading.

There are three cases where the ability to convert a fund holding, rather than selling and rebuying, would help customers:

When a customer is transferring to a new platform, the existing platform should allow any holdings in discounted share classes to be converted to a widely available share class so that they can then be transferred in specie to the new platform.

Having transferred, the new platform should allow the customer to convert their fund holdings to the best equivalent share class available on that platform. If a platform negotiates a new discount with a fund manager, existing customers should be allowed to convert any holdings in the same fund to the new share class.

Regulator focus

No wonder, then, that the FCA has turned its attention firmly on share class conversions in the recent investment platforms market study. Platforms are already obliged to offer investors who wish to transfer between providers the option of re-registering the units to the new platform (that is, an in specie transfer). The FCA is now proposing that the ceding platform must also be able to convert the units, if necessary, to effect the in specie transfer, and the receiving platform must convert the investor again, if necessary, to get the best value share class.

The industry is now waiting with bated breath for the publication of the FCA’s final policy decision, which is expected by the end of 2019.

Most providers expect the FCA to confirm the requirement to support share class conversions and the question now occupying their minds is exactly how long the FCA will give them to implement the changes.

Ben is a founding director of Altus.

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