Written by Ben Hammond on Wednesday 26 November 2014
Following on from Part 1 of this blog, Part 2 looks at the possible outcomes and what progress is being made towards Sunset. As a reminder…
What’s the dictionary definition of a sunset clause?
“A sunset provision or clause is a measure within a statute or regulation that provides that the regulation shall cease to have effect after a specific date, unless further legislative action is taken to extend the law”. The regulation is PS13/1 and the date in question is 6th April 2016… and there is no sign that the FCA will be extending its decision. Nope, definitely don’t expect to see a flying pig anytime soon.
It has been well documented in the press that both platforms and advisers are grappling with the ‘big turn off’ of legacy commission. The likes of Fidelity and Cofunds are letting advisers lead the charge before bringing up the rear in the months to come, with Old Mutual Wealth changing their previous stance just this week to one of bulk conversion, starting in early 2015.
Adviser firms may prefer the continuation of commission for as long as possible in the main, however they will be concentrating their own efforts on the more profitable customers, with those who have a lower level of assets left until last. This means platforms are likely to have to pick up the slack in the second half of 2015, assuming they haven’t already taken the (sensible?) decision to bulk convert to clean – Standard Life, Ascentric and Novia being some early adopters.
Loss of trail, I mean legacy commission
Adviser firms may look at the amount of commission they receive from their smaller value clients (let’s say those with under £100k) and seriously consider their options and profitability. Should they bother spending what could well be more than the level of commission itself tackling what is often a complicated, paper-heavy process of moving them over to explicit charging?
The Platforum has suggested the total hit to legacy commission could be as high as £780m, whilst The Lang Cat quotes a more conservative estimate of £400m. Standard Life estimated that as much as £100bn of assets could move between funds and/or platforms before April 2016, with some fund managers sneakily putting their prices up in the process.
The upshot is that platforms and advisers are under significant pressure to provide a duty of care to customers and do their best to avoid every non-medium or high net worth customer on their books becoming an orphan.
Getting it right
The FCA will be checking to ensure everyone’s on track for 2016 and repeating the message that a good customer outcome should be the goal at all times. However, what can an adviser or platform do if the customer doesn’t want to pay separately for the services they are already receiving or doesn’t respond when told what their options are? Guidance from the FCA was provided earlier in the year which aims to help answer some of the uncertainties, however, as usual, it’s very much open to interpretation, especially when trying to calculate potential client detriment. Add the profitability issue into the mix and we could have what has been coined a ‘blood bath’ on our hands!
It’s unlikely that any platform will be willing to offer their services for free, even for a short time, so what happens then? The best outcome would be a properly thought through, customer-centric orphan proposition than enables continuation of service.
The worst case scenario could be that the platform will liquidate a customer’s assets creating tax liabilities and the loss of tax efficient wrapper status. In my opinion, this is something that no one, especially the regulator, is going to be keen on!
Read part 1 of this blog: PS13/1: Sunset; the real view for platforms and advisers part 1