Exit fees, in-specie transfers and other recent developments from the Investment Platforms Market Study

In this article Grania Baird and Kya Fear summarise the Investment Platforms Market Study Final Report  from the Financial Conduct Authority (FCA), as well as the FCA’s proposed new rules regarding in-specie transfers between platforms, and the discussion on exit fees, outlined in the Consultation on Investment Platforms Market Study Remedies. 

The article may be of interest to a number of market participants including platform service providers (and comparable firms), authorised fund managers, and investment advisers.

1. Overview

In July 2017, the FCA launched the investment platforms market study to ensure that platforms compete to offer services which add value and meet the expectations of retail investors (consumers) and financial advisers who may be acting for consumers.

The FCA looked at whether consumers can select a platform that best meets their needs and how competition is working when advisers choose platforms on investors’ behalf. It further looked at whether consumers can make informed decisions once they have chosen a platform, and whether there was healthy competition between platforms.

The FCA found that the market is working well overall, but that it could be made easier for consumers and advisers to shop around between platforms and switch platforms.

2. Shopping around between platforms

The FCA expects platforms and comparable firms to continue to facilitate consumers’ cost comparisons. The FCA did not propose additional disclosures, instead it is encouraging firms to consider work already undertaken regarding costs and charges, as set out in the FCA’s Feedback Statement on Smarter Consumer Communications (here) and its Occasional Paper No.32 (here). The FCA also directs firms to its MiFID II costs and charges disclosures review findings (here).

The FCA will review progress in 2020/21 and then consider appropriate regulatory intervention if needed.

3. Switching platform

The FCA is concerned that consumers and advisers who want to switch platforms find it difficult to do so because of the time, complexity and cost of switching which is driven in part by difficulties in switching between unit classes and exit fees.

The FCA proposes a package of remedies to make switching more efficient, including enabling unit class conversion and opening a discussion on the banning or capping of exit fees.

3.1 Making the switching process more efficient

The FCA wants platforms to improve their standards for transfer and re-registration times, clearly communicate the switching process to consumers (including providing timelines and contacts for queries and complaints) and publish transfer times data so third parties can compare platform performance.

The FCA welcomes and supports progress to improve the switching process such as through STAR, a not-for-profit joint venture which is implementing a framework setting out expectations for end-to-end standards, customer communications, and which provides oversight and transparency.

The FCA will review progress, and if efficiency is not improved it will consider revisiting potential “sunlight remedies” which would “shine a light” on firms’ switching times.

3.2 Exit fees

In the Consultation Paper, the FCA proposes either of a ban or a cap on exit fees and views were sought on:

• How an exit fee should be defined

  The FCA’s initial view is that an exit fee is a charge imposed by platforms as well as comparable firms on consumers following a request to disinvest or transfer assets to a new service provider. Typically, the FCA says, these take the form of a fixed cash amount or a percentage of each holding, to be encashed or transferred away from the platform or other service. The FCA also believes that other fees relating to exit, such as account closure fees, withdrawal fees, and in-specie transfer fees should be included in the definition.

• The scope of intervention

  The FCA’s initial view is that any remedy that bans or caps exit fees ought to apply to platform service providers and firms offering a comparable service to retail service providers. The FCA is minded to define a “comparable service” as comprising any one or more of the following: (i) dealing and arranging activities, (ii) managing investments, or (iii) sending dematerialised instructions or causing such instructions to be sent. This is provided that the service also includes: (a) the administration and safeguarding of assets, or (b) arranging for one or more persons to carry on the safeguarding of assets and the administration of assets.
  
  Crucially, this proposal would capture firms which provide distribution services to retail investors even though they do not necessarily provide access to third party investment products.

• The nature of the intervention

  The FCA’s Final Report concludes that an outright ban is more likely to have a positive effect on competition across the market. However, in the Consultation Paper it encourages firms to give their views on which is more appropriate – a ban or a cap.

3.3 Unit class conversions

The FCA is concerned that not all platforms are offering consumers unit class conversions. Instead, platforms are requiring units in the same funds to be sold by the platform the consumer is switching from (ceding platform) only to be bought again by the platform the consumer is switching to (receiving platform), resulting in consumers facing unnecessary transactional costs, and sometimes adverse tax consequences. To address this, the FCA proposes new COBS rules requiring:

• platforms to offer consumers the option of “in-specie” transfers of units in investment funds where the transfer request concerns funds that are available on both the ceding platform and the receiving platform,
  
  
• where a consumer chooses an “in specie” transfer but their investment is in a unit class not available for purchase on the receiving platform, the ceding platform should request the fund manager to carry out a conversion of the units to a class which the receiving platform can accept as an “in specie” transfer, and take reasonable steps to bring this about, and
  
  
• the ceding platforms to offer consumers the opportunity to convert their units into a discounted unit class, where such unit class is available for investment by the customer on the receiving platform.

The proposed effective date for the new rules is 31 July 2020.

4. Competition between adviser platforms

With respect to adviser platforms, the FCA has two key concerns. The first concern relates to clients that are no longer advised (orphaned clients). There is a risk that competition for these orphaned clients is weak. The second concern relates to how platforms compete for advisers ie by offering advisers services which may not always benefit the end consumer.

The FCA will follow up with the firms that currently charge additional fees to orphaned clients. However, it was assured that platforms generally have controls in place that sufficiently manage the risk of orphaned clients continuing to pay advice fees, and generally have in place processes for communicating with orphaned clients, giving orphaned clients options to switch platforms or find a new adviser.

With respect to services offered to advisers by platforms to compete for business, the FCA wants platforms to offer services that provide direct or indirect benefits to consumers and which do not distort advisers’ incentives when they choose platforms on behalf of consumers.

5. Helping consumers make informed choices regarding investments available to buy on the platform

The FCA considered the investment choices consumers make on platforms: investing in funds, investing in model portfolios, holding money as cash and investing in securities.

While platforms generally assist consumers make informed choices, the FCA saw room for improvement by platforms through:

• presenting fund charges in a helpful way,
  
  
• using fund promotions to help consumers choose investments,

• providing model portfolios to consumers,
  
  
• ensuring consumers understand the costs of holding cash on a platform, and
  
  
• achieving and demonstrating best execution results when dealing in securities (and the FCA will review this, proceeding with supervisory intervention as appropriate).

6. Entry, expansion and commercial relationships

Finally, the FCA considered if new firms can challenge incumbent platforms by entering the market and expanding to compete for, and win, customers. The FCA found that fund discounts (through super clean unit classes) create barriers to switching, making it difficult for new firms to challenge incumbent firms but considered that barriers will be alleviated by proposed rules requiring platforms to facilitate unit class conversions. Additionally, the FCA reminds firms to self-assess their most-favoured nation arrangements (if any) to ensure compliance with competition law.

7. Next steps

In relation to the Final Report, the FCA will be reviewing the progress firms are making to, amongst other things: (i) enable consumers to compare costs and charges, (ii) improve switching efficiency, and (iii) demonstrate best execution. The FCA will also be following up with platforms charging additional fees to orphaned clients.

Platforms and comparable firms should therefore continue to reduce complexity and improve clarity concerning consumer charges to enable consumers to shop around, and platforms should be:

• making their switching processes more efficient,
  
  
• helping investors make informed choices by, for example, explaining the costs of holding cash on a platform,
  
  
• putting policies in place to explain to orphaned clients what their options are,
  
  
• assessing whether the services they provide to advisers to compete for advisers’ business benefits the end consumer, and
  
  
• reviewing their best execution policies.

In relation to the Consultation Paper, the FCA:

• is considering responses in relation to the draft rules relating to “in-specie” transfers and unit class conversions before issuing a Policy Statement, and
  
  
• is considering responses in relation to banning or capping exit fees, and may issue a formal consultation later this year. 

If you require further information about anything covered in this briefing, please contact Grania Baird or Kya Fear, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, August 2019