Platforms and discount brokers will be forced to come clean

The Financial Conduct Authority (FCA), part of what used to be the FSA, published new rules today confirming that fund platforms and discount brokers white-labelling platforms will finally be forced to come clean over how much customers pay for their services..

This is great news for customers, as many may currently be unaware how much a platform or discount broker is effectively charging them via undisclosed commissions and/or platform fees.

So what's happening?

The current system of fund managers paying fees and/or commissions to platforms out of fund charges will be banned for new business from 6 April 2014, to be replaced by explicit fees charged directly to customers and lower cost 'clean' versions of funds (without commissions and platform fees built in).

The deadline for funds already held prior to next year's ban will be extended by two years until 6 April 2016, although subsequent fund switches or an increase in regular saving will instantly trigger the ban.

Why the change?

At present the majority of platforms rely on commissions and/or platform fees paid by fund managers to earn their crust. The problem is these payments are not always disclosed, leaving customers with no idea how much they're really paying a platform , via fund charges, for its services. It also casts suspicion (rightly or wrongly) over the integrity of 'favourite' fund lists promoted by some platforms and discount brokers.

The new rules should remove these issues. Customers will be able to see exactly how much they're paying and to whom, hence be in a much better position to judge whether they're getting value for money.

Who's affected?

A lot of people I imagine, as the rules will impact some of the largest and most popular fund platforms that sell direct to the public, including Hargreaves Lansdown, Bestinvest, Barclays Stockbrokers and Fidelity FundsNetwork. As well as discount brokers who white label platforms, for example Chelsea Financial Services, Willis Owen, Cavendish Online and rPlan.

However, those using platforms already operating along the lines of the new rules, namely Charles Stanley Direct, Alliance Trust Savings and TD Direct Investing should be largely unaffected, although the latter two still have some customers with older style funds that will need to converted to 'clean' versions.

What change can I expect and when?

Funds that currently bundle commission and platform fees into their annual charges will eventually cease, by April 2016 at the latest. If you currently hold such funds then at some point they'll need to be converted to clean versions. In simple terms, this means an annual charge of 1.5% might fall to around 0.75%. However, you'll then need to pay a fee directly to the platform and, if you're using one, discount broker - the combined total of which might be the same, higher or lower than you're currently paying.

Of course, moving to clean units could take place well before April 2016, depending on when platforms decide to make the move. And, in any case, you can force change yourself by transferring to a platform already offering clean units.

That's the end of fund commission then?

Yes. It's already banned where advice is given. And since HMRC is now taxing commission rebates paid to customers outside of ISAs and pensions I suspect we'll see most platforms and discount brokers go clean before the official deadlines.

Any tax implications when switching to clean units?

Possibly - if you sell existing units and repurchase clean units outside of an ISA or pension then any gains will be subject to capital gains tax as usual. However, provided the platform or fund manager carries out the conversion then no tax will apply and your purchase price will remain the same as the original. As things stand this only applies if conversion is carried out en masse, but new HMRC rules due in May will extend this to conversions carried out for individual investors.

Will a fund's clean version cost the same everywhere?

This is a big question and it's too soon to answer. But the issue is best explained using Hargreaves Lansdown (HL) as an example. Based on current documents the company currently receives an average 0.77% annual commission from fund managers, from which it rebates an average 0.17% a year to customers in the form of a 'loyalty bonus'. So, a simple margin of 0.6%. If HL wants to maintain this margin on moving to clean units then it would somehow have to charge its customers an average 0.6% a year. If clean units via HL cost the same as everywhere else then overall cost will look expensive after adding HL's fee, so the company has a big incentive to negotiate lower annual charges from fund managers than competitors - else customers might decide to move elsewhere.

However, fund managers, especially those running the most popular funds, might resist. If they give HL a better deal it will, for the first time, be there for all to see. Competitors will demand (and in time probably get) the same deal reducing manager margins forever. Hargreaves Lansdown has already fired a warning shot by saying commercial negotiations will affect the formulation of its Wealth 150 list in future (see this http://www.moneymarketing.co.uk/investments/hargreaves-wealth-150-may-shrink-in-rdr-pricing-world/1070151.article trade publication article), so it'll be an interesting power struggle to watch.

Anything else?

One surprise is the FCA confirming that platforms and discount brokers may continue to receive advertising fees from fund managers. Since this is a potential source of bias it's a strange decision. I would urge all platforms and discount brokers to make public statements on whether they accept any monies from fund managers other than commissions or platform fees on existing business. And if they don't disclose this customers should demand the information, as without it a question mark could still hang over the promotion of particular funds.

One thing's for sure, there'll be a lot to keep an eye on over the next year or so...

Read this article at http://www.candidmoney.com/articles/270/platforms-and-discount-brokers-will-be-forced-to-come-clean