The recent announcement by HMRC on taxing rebates has reinvigorated the share class proliferation debate.
(Incidentally, who’d have thought an announcement from HMRC including the words tax and rebate would cause such dismay?) The arguments put forward say that because the likes of Skandia and Standard Life can no longer rely on a higher level of rebate to reflect their scale they will require preferential share classes. With each platform requiring a share class preference commensurate with its scale the result will be a dozen or so share classes for each fund.
Clearly, this isn’t going to happen. It would be horribly confusing for customers, the rug would be pulled from under the nascent RDR driven re-registration initiative and, most importantly, I don’t hear anyone volunteering to pick up the soaring administration costs.
The most likely outcome is probably some halfway house with 3 or 4 share classes for each fund. The platforms and fund managers will be forever wrangling about how much scale you need to get the cheapest class, re-registration will be slightly clunky (requiring post transfer conversions in some cases) but will still work, and customers will only be slightly confused about which class they own and what the current price is. So if that doesn’t sound ideal, what would be?
The first conclusion to draw from the debate is that the clean share classes currently on offer aren’t very clean. There’s clearly a significant margin in the typical 75 bps rate still to play with. So supposing we turn rebates on their head and fund managers offer a single really clean share class at 40 or 50 bps but also charge for transaction processing. (The word clean is already sullied so let’s call these bare share classes.) An individual customer or IFA going direct to the fund manager would get this great value share class but would have to pay say £25 for each order they place. The transaction fees would be reduced for the smaller platforms and waived completely for the largest players.
With this approach the customer would have clarity on unit prices, quick and simple re-registration between platforms, and no unnecessary tax. The platforms would have simpler administration processes and could still make use of their scale when negotiating with fund managers. The regulator would have transparency throughout on charges. Deep down it feels like this is where we’ll end up at some point, but the question is whether there are any fund managers brave enough to announce that they’ll be adopting bare share classes wholesale at the end of the year. If the publicity this would create isn’t enough of an incentive then the fact that early adopters would inevitably be referred to as the bare share bunch should clinch it (assuming fund managers watched the same low brow children’s cartoons as I did in the 70’s).
