Ben Cocks
FCA connects competition and conversions
Written by Ben Cocks on
Unit class conversions get top billing from the FCA in its efforts to improve competition in the platform market.

The once esoteric topic of unit class conversions has at last emerged from the dark and dusty back offices of transfer agent experts into the spring sunlight of the FCA Investment Platforms Market Study. Whilst plans to restrict exit fees have made the early headlines, it is unit class conversions that get top billing from the FCA in its efforts to improve competition in the platform market.

It is increasingly common for platforms to negotiate discounts on fund charges for their customers. That discount will often be provided in the form of a new share class with lower annual fees. The FCA sees this as a sign of healthy competition in the market.

But, as many commentators have pointed out, the customer may not always benefit from that competition because the cost or risk of accessing those new share classes can be prohibitive. If you have an existing investment in a fund but must sell it and then re-buy a newly available share class in the same fund then the downsides of out of market risk and possible adverse price swings are likely to outweigh the benefit of any discount (see our longer description in our previous blog).

There are three cases where the ability to convert a fund holding, rather than selling and rebuying, would help customers:

  • 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
  • Having transferred, the new platform should allow the customer to convert their fund holdings to the best equivalent share class available on that platform
  • If a platform negotiates a new discount with a fund manager, existing customers should be allowed to convert any holdings in the same fund to the new share class

The FCA has highlighted the first two of these cases in their chapter on ‘Making Transfers Simpler’. It hasn’t specifically addressed the third case but hopefully this will be rectified during the consultation phase. Otherwise we might see the strange phenomenon of consumers transferring to another platform and immediately back again just to access a new share class appearing on their original platform.

Ever since the terms ‘clean’ and ‘super-clean’ first appeared in the run up to RDR, the industry has been debating the conversions challenge. We’ve all recognised the benefit to customers, and we’ve drawn up plans to address the legal and technical practicalities.

But it’s much easier to draw up plans than it is to get the industry to act on them. As was the case for RDR and in-specie transfers, it looks like it will take action from the regulator for any of those plans to bear fruit.

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