Platforms and Regulatory Change
Platforms and Regulatory Change
It has been a busy year for platforms and regulatory change not the least being RDR requirements that go beyond adviser professionalism to the complexities of facilitating adviser charging, the impact on white labels and obtaining consent from the retail client, as well as planning for the ban on rebates and the issue of fund short reports in 2013.
In addition to RDR there has been the ongoing reform of the CASS rules including implementation of the CASS Resolution pack as well as UCITs IV KIIDs requirements in July, changes to SIPP illustrations requirements, new guidance on the use of model portfolios and increased focus on UCIS.
Although many platforms have been set up with adviser charging in mind the rules require consent to be obtained from the retail client and that adviser charges must meet the requirements of the adviser charging rules to be facilitated. It will no longer be acceptable for the instruction to come solely from the financial adviser. The client must also be able to ascertain, as near as possible the total charge payable with an estimate of the cost of the service if based on hourly rates.
Platforms need to look at the way they obtain retail client consent to ensure it covers every type of charge whether based on assets, regular payments, dealing or fixed amounts for initial charges or ongoing adviser charges. Existing agreements therefore need to be checked to ensure they meet all RDR requirements. Re-labelling existing commission arrangements as adviser charging without evidence of compliance would not be acceptable.
Passing a platform margin to a whitelabelled proposition is also unacceptable under RDR as only adviser charges can be facilitated. Any margins would have to be added to the adviser charge in a fully transparent model unless the adviser obtains platform permissions and becomes vertically integrated. This raises the costs and complexities of becoming fully regulated as a BIPRU firm subject to the full capital requirements of MiFID and the extent of outsourcing required from platform operations to custodianship of assets and client money. It is not an option for most financial advisers without considerable financial backing.
The ban on cash rebates has come after continual reviews by the FSA with an extension to direct offer platforms and an acceptance of unit rebates as an alternative. Platform cash being has been regarded as a facility to pay adviser charges whereas platform cash accounts can form part of a balanced portfolio as well as covering the costs of providing the platform service itself.
However, with the cash rebates argument being put behind us by the FSA in the run up to RDR the complexity of handling unit rebates creates a range of difficulties that will have to be resolved in 2013. All of these unit movements will need to be reflected in periodic statements creating additional paperworkfor many customers
The simplest resolution to unit rebates would be a ‘flip’ of share classes sometime in 2013 and continuing lobbying of fund managers to settle for a reduced charged share class with, as far as possible, a homogeneous approach. Platforms will be working with fund managers to undertake concurrent ‘flipping’ when assets are re-registered allowing a simple switch from one share class to another. If platforms cannot persuade fund managers to ‘flip’ concurrently the reporting, explanation and reconciliation costs will rise and be reflected in charges to the customer.
There is now the requirement to provide customers with ‘short reports’ and additional fund information although this has also been postponed for a year. Short reports can be provided electronically in a ‘funds library’ but this will require client access wherever possible and if not reports will have to be provided by post and at least quarterly. This will require IT build and a change to models that have traditionally focused on adviser access only.
A last minute update to the RDR rules appeared in a Handbook update in October. Some commentary suggested this rule impacted on platforms facilitating payments to DFMs for providing discretionary portfolio management but this is not the case. The existing guidance regarding remuneration for ‘related services’ has been changed to a rule and includes any administrative service conducted between a DFM and a retail client. The effect is to bring activities of advisers working with DFMs into the adviser charging requirements. It bans payments from DFMs to advisers for making referrals of retail clients for whom any administrative service is provided by the adviser. If a platform facilitates DFM charges it should obtain client consent for the payment in the same way as adviser charges and ensure that no payment is facilitated from the DFM to the adviser.
With around £40 million of fines relating to CASS compliance in the last couple of years the FSA has produced a rash of consultations and policy statements on CASS compliance. Although the fundamental CASS rules have not changed another chapter of CASS emerged on 1 October 2012.
The CASS Resolution Pack requires putting all procedures, documentation and evidence of CASS Compliance into a master document so it can be easily obtained in the event of a failed firm but must also be available to the FSA whenever they wish to see it.
Over 250 letters to retail intermediary and provider firms were issued by the FSA highlighting concerns about UCIS. The FSA have drawn attention to the Responsibilities of Providers and Distributors for the fair treatment of customers (RPPD). The RPPD requires all firms in the distribution chain to consider their responsibilities in terms of their ‘action or inaction’ with regard to the provision of retail investment products to customers.
Platforms are viewed by the FSA as distributors although many are also product providers, where they act as SIPP operators and ISA Managers. SIPP presents challenges for UCIS, as many UCIS funds have redemption clauses that go beyond two years, which would breach HMRC rules for death benefits. Platforms also need to provide sufficient information on hosted funds and UCIS are unlikely to participate in conventional fund information systems requiring links to prospectuses that have to be maintained.
Centralised Investment Propositions (CIP)
The FSA issued guidance on the types of portfolio services possible including the popular model portfolio option where the adviser has a relationship with the DFM and acts as agent of the client. Model portfolios on platforms tend to operate in this way but the client has to be clear that they have no direct relationship with the DFM and the adviser is acting as their agent and not providing investment management, which is provided by the DFM.
KIIDs and SIPP Illustrations
Platforms need to ensure Key Investor Information Documents (KIIDs) are made available and draw attention to them especially where clients are able to trade directly in funds as fund managers expect clients to read them. SIPP illustrations will be a requirement from the year end though most SIPP operators were already providing illustrations.
We also look forward to twin peaks regulation in 2013 of the FCA and PRA.
5th November 2012