Top of the List: FCA prioritizes unit class conversions to increase platform market competition.

Top of the List: FCA prioritizes unit class conversions to increase platform market competition.

Boosting platform market competitiveness

The FCA Investment Platforms Market Study has finally shone light into the shadows of transfer agent expert offices, revealing a new focus on boosting platform market competitiveness. Although the early headlines promoted proposals to limit exit fees, the FCA has instead prioritized unit class conversions in its attempt to boost competition.

Platforms are increasingly negotiating lower fund charges on behalf of their investors. This discount appears in a new share class with reduced annual costs. The FCA interprets this as evidence of beneficial market competition.

Cost challenges

The cost of gaining access to these new share classes, however, can be onerous. And, as many observers have noted, the customer may not always benefit from this competition. The drawbacks of out-of-market risk and possible unfavorable price swings are likely to outweigh the benefit of any discount if you already own an investment in a fund but must sell it in order to repurchase a newly released share class in the same fund (see our longer description in our previous blog).

These are 3 scenarios in which customers would benefit from the opportunity to convert a fund holding instead of selling and then repurchasing:

  1. 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
  1. After the transfer, the new platform should permit the consumer to convert their fund holdings to the best equivalent share class made accessible on that platform
  1. If a platform negotiates a new discount with a fund manager, existing clients should be permitted to convert any holdings in the same fund to the new share class.

Making transfers simpler

TFCA's chapter on "Making Transfers Simpler" highlighted the first two of these incidents. The third case has not been properly addressed, but perhaps this will change during the consultation stage. If not, it is likely that some users will switch platforms, only to return to their previous platform to access a newly introduced share class. Not the best customer experience possible.

The industry has been discussing the challenges with conversions ever since the labels "clean" and "super-clean" first surfaced in the run-up to RDR. The industry has been able to identify the advantage for customers and developed measures to deal with the logistical and legal issues.

At the end of the day, creating plans is far simpler than getting the industry to implement them. For any of those proposals to succeed, the regulator will need to take action, just like they did for RDR and in-specie transfers.

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