Funds

In March, the FCA published a final report on its Investment Platforms Market Study. The report considers how investment platforms are servicing investors’ needs.

While there are some recommendations for regulatory change,  the FCA’s proposals are on the whole fairly limited. The proposals for change are set out in a consultation paper (Consultation on Investment Platforms Market Study Remedies CP19/12) which is published at the same time as the Market Study. In a number of areas, the FCA  refers to developing proposals from product providers and will give the industry time to take these developments forward.

Full details of the review can be found in our detailed Update but we highlight some of the important areas covered below.

Platform Charges

The FCA has focussed on price transparency as a common theme affecting investors and it reviews  how different pricing structures affect investors in the platform market. Issues that the FCA considers include:-

  • different fee types and how fees are described on investment platforms;
  • transparency in relation to fees;
  • prominence of fee structures.

The ability to compare fees should be an important tool for consumers and a lack of clarity does not assist in the development of a competitive market.

The FCA has delayed taking further steps to regulate here. It recognises a number of encouraging steps towards improving transparency and clarity within the industry. It has stepped back while these develop.

Switching

Switching between providers is a key issue for the FCA. The ability to switch provider is an important factor leading to improved competition. The current process:-

  • arguably takes too long, is complex and expensive;
  • may impose exit fees;
  • raises difficult issues where specific share classes are only available to certain platform providers.

The consultation paper outlines the steps that the FCA is proposing to improve the investor experience.

The proposals will make it easier for investors to transfer units in specie. The aim is to avoid investors cashing  out of units on one platform before re-investing on the new platform. In particular, the proposed rules will require that:-

  • the platform must offer investors the choice of transferring in specie where the same fund is available on both the ceding and receiving platform;
  • where the receiving platform and the ceding platform have different classes of unit available, then the ceding platform should ask a fund manager to carry out a conversion;
  • if the receiving platform offers a discounted share class, the investor should be given the opportunity to convert into that share class.

The FCA notes its support for steps being taken to improve transfer and re-registration times in the industry generally.

Exit Fees

The consultation paper poses questions on whether to ban or restrict the imposition of exit fees which are perceived as a barrier to switching.

Responses are requested on issues including what is an exit fee; the type of firm that the restriction should apply to; and whether there should be a ban or simply a cap on the fees that may be levied.

General issues

Other issues considered include the experience of orphan clients on advised platforms. These are  clients introduced to a platform by their adviser but where the relationship has subsequently ended. The FCA also considers the issue of non-monetary benefits made available to advisers for using platforms.

In both areas, the FCA has no proposals to make rule changes at this stage.

It has also considered:-

  • how fund charges, as opposed to platform charges, are dealt with;
  • best buy lists and whether the inclusion of in-house funds can create conflict issues;
  • model portfolios for non -advised clients. In particular, the FCA has concerns as to how non – advised clients are able to compare and contrast different model portfolios.

There are no firm proposals for change in the first two cases. As regards model portfolios, the FCA focuses on the proposals in Policy Statement 19/4 to improve descriptions of fund policies and objectives.

Finally, the FCA touches upon trading execution and whether platforms secure the best execution. Issues around the treatment of  cash balances held on platforms are also highlighted.

Frank Doran

Consultant at Brodies LLP
Frank has for many years specialised in the financial regulation and investment fund sectors and regularly advises clients such as banks, asset managers and insurers on compliance with existing legislation and preparing for future developments. His area of expertise includes compliance with the FCA and PRA Rulebooks and legislation that affects companies in the sector such as FSMA, AIFMD, MiFID and EMIR.
Frank Doran