Platform Rebates The sun is setting
Nick Lee looks at the importance of understanding the rules and repercussions of the sunset clause and assesses what it will mean to advisers and platforms
For some it may feel like a long way off and for others just a long time coming, but the sun is finally setting on cash rebates and platform legacy assets in April 2016. Policy statement PS 13/1: Payments to platform service providers and cash rebates from providers to consumers April 2013, which outlines the sunset clause changes, is of huge importance to both platform operators and advisers. Both need to understand the rules and the repercussions. Even though it was published 18 months ago, it seems like the full scope of its impact and consequences are still coming to the fore. I’m sure there are even more discussions to come, too.
Similar to the Retail Distribution Review in 2012, this policy statement prohibits what was a particularly common way of working. Previously, businesses could place clients’ assets on platforms and the rebate from the fund manager could be used to cover, to some degree, both the platform operators’ and advisers’ charges. From 6 April last year, when new assets were placed on a platform, the rebates could not be paid to the platform operator and cash rebates could not be passed to the consumer.
The impact on adviser businesses In the future, it is advisory businesses that may be impacted the most by the provisions of the sunset clause. There are a number of issues for advisers to consider, including:
• Trail commission: the policy statement does not outline whether or not a client has to move their assets to clean share classes; however, by default, trail commission will cease on either option.
• Value: the impact on business value as a result of these revenues being disturbed.
• Clients: there will be a need to manage a client’s expectations if they switch platforms, making sure they understand the different structure and costs of a new platform. It’s fundamental that clients are aware of the disparities between platforms.
How about platform operators? A platform can be a fundamental part of delivering the client service proposition, so understanding a platform operator’s development plans and forming a view of their financial strength and commitment to the market is perhaps even more relevant for advisers now than it has been previously.
We are now operating in an explicit charging world where the costs of all the elements of the supply chain are transparent. This has to be good from the client’s perspective and one consequence is that all the individual parts of the chain may become ‘markets’. We have certainly seen this in respect of fund management charges (e.g. clean and super clean share classes), in addition to a downward trend in platform charges.
The Financial Conduct Authority (FCA) in its Thematic Review (TR 14/5) on the supervision of retail investment advice and specifically the delivery of independent advice, comments on the use of platforms. There is a requirement for firms offering independent advice to be aware of the limitations of platforms. Additionally, firms must also take reasonable steps to ensure it uses a platform that presents retail investment products without bias and satisfy themselves that the platform is only remunerated as permitted by the rules.
So what does it all mean?
All of these issues may mean that advisory firms need to review their due diligence
Nick Lee is Head of Strategic Partnerships at AXA Wealth
processes to ensure that the choice of platform is driven by the needs of clients and service propositions. Requesting information regarding a platform operator’s background, strategy, proposition, operations and support services is the foundation of robust due diligence, providing an audit trail that clearly documents the decision making process.
2015 is set to be a busy year for advisers and providers alike with numerous deadlines looming. For advisers, don’t shy away from these proceedings if you can complete the work now. Even though rebates can continue until 5 April 2016, it’s important to manage any issues you’ve identified now, as the FCA expects the work to have been completed well before the implementation date.
This will allow greater scope to think about the wider effects of the sunset clause and how to deal with the long-term implications. Surely it will be better to be able to kick-back and enjoy the sunset, rather than working late into the night!
Wraps and Platforms
Investment Life & Pensions Moneyfacts
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