Asset transfers between investment platforms are on the rise, as retail customers search for better fund deals elsewhere. Transferring assets between platforms – in theory – should be a fairly routine exercise, but this is not always the case.
The FCA’s Investment Platforms Market Study confirms how the complexity of asset transfers often results in investors incurring added costs. Costs, such as management or exit fees, can erode returns and deter consumers from changing platforms. Altogether they give rise to weak competition.
The inefficiencies in asset transfers
Industry experts concur retail investors face a number of hurdles when attempting to move between platform providers.
“The biggest barriers faced by investors looking to transfer are the time it takes, the complexity involved and the cost. Advisers mention similar issues when switching their clients’ investments between platforms, along with an additional burden of evidencing suitability,” said Richard Bradbury, a research director at Platforum.
According to a study by the Financial Conduct Authority (FCA), 7% of consumers had wanted to switch platform providers, but failed to do so. Moreover, a recent report found £184 billion of UK investor cash is still stuck in funds that continue to pay commissions to financial advisers, which are typically 59bps on average more expensive than commission free funds.(1)
Even though some platforms no longer charge exit fees, the FCA study found they continued to be a problem for many investors. In addition, standard transactions can also take in excess of three weeks to finalise, although some of the more complex asset transfers (i.e. transactions involving synthetic derivatives held across multiple markets) might not complete for as long as three months.
“The speed of transfers and complexity is primarily driven by the investments within portfolios. Transfers wholly in cash tend to move relatively quickly. Things slow down when more esoteric assets are involved, or when an investment is not available on the receiving platform. Unfortunately, one pesky line of stock in a transfer can lead to inordinate delays to an entire portfolio,” said Bradbury.
The IPMS’ findings
This is a problem which the FCA in the UK has cottoned onto. In its recently published Investment Platforms Market Study (IPMS), the FCA said it had identified a number of concerns encountered by consumers when moving their investments onto new platforms.
Tobin Ashby, a partner at law firm Pinsent Masons, said that, as part of the IPMS and in pursuit of the FCA’s competition objective, the regulator wanted to make it easier and quicker for investors to transfer between platforms. “The regulator will see this as a continuation from the changes it made particularly from 2013 to 2016 to increase fee transparency and encourage customers to consider the costs of their investments.” he said.
While the FCA said most platforms permit fund units to be transferred in-specie (i.e. when the units are re-registered by the manager and the client remains fully invested in the fund), “this does not always occur in practice, nor is it always carried out in the most efficient way.” (2) The FCA also found the re-registration of assets can be especially problematic when there are multiple versions of share classes within the same fund on a given platform.
As the share classes might not be available on the new platform, it is not uncommon for some firms to reject conversion requests while others may simply refuse to provide in-specie transfers when there is a share class mismatch.(3)
“Clients wishing to transfer are then required to liquidate their units and either transfer across the cash for reinvestment through the new platform or buy new units in a standard share class, purchased at a different valuation point, and transfer those units to the new platform”, continued the FCA.
However, this can expose investors to market volatility and even generate potential tax liabilities. Elsewhere, the FCA discovered clients are not always given the option by new platforms to convert their existing units into a discounted share class.
The Regulatory Solution
The FCA is proposing a series of rules designed to streamline the asset transfer process, which will take effect from 2020.
The FCA has said it wants to formalise requirements for platforms to provide investors with the option of an in-specie transfer of units in funds on condition that the same investment product is available on both platforms
This position supported by the Investment Association (IA) and is commonly offered by platforms while the FCA would like to introduce a rule to ensure consistency across the market.
The FCA has also instructed platforms to facilitate share class conversions so as to prevent customers from having to sell their investments during the transition. And finally, the regulator has told receiving platforms to provide clients with the opportunity to convert units into discounted share classes when they are available.
These reforms will require platforms to implement meaningful operational changes – mainly to their transfer application materials – but the provisions do remove several obstacles that have long impeded investors from porting assets to different providers.
“While the market is working well for most of its consumers, the package should make it less expensive and time-consuming for investors to shop around and move to the platform that best meets their needs,” said Christopher Woolard, executive director of strategy and competition at the FCA.
The FCA appears to be adopting a measured approach. “The regulator is keen for the industry to lead improvements to their existing practices, and what it is asking of platforms will in effect be to build on a lot of the work platforms have already done. If – for whatever reason – improvements do not happen or progress is slow then we can expect the FCA to look at introducing further rules,” acknowledged Ashby. Moreover, the FCA will carry out a review in 2020/2021 on the industry’s progress, after which it will decide on whether any further intervention is necessitated.
Operational challenges to be addressed
However, there are operational barriers. In a letter to the FCA on the IPMS, the IA – while fully endorsing the proposals about giving investors the option of in-specie transfers – said some members reported delays when transferring a fund from a non-platform holding (e.g. a SIPP).(4)
The IA also warned that “a move to a share class common to the two platforms would in many cases result in moving an investor to a more expensive share class and the consequences of this would need to be made explicit to the investor before the conversation takes place.”
Furthermore, the IA said the rules would likely have other effects too. “Member firms have reported that there will be an increase in the number of conversions performed by ceding platforms, which will lead to increased administrative costs for platforms and fund managers,” said the IA. (5)
However, the IA conceded it was unsure whether these additional charges would be materially different to the costs involved when selling holdings and transferring the proceeds to another platform.
Other impediments risk potentially frustrating the FCA’s reforms as well. “While proposing ceding platforms switch share classes sounds good on paper, but in the instance where funds are gated in-specie transfers are possible, but switching between share classes is not,” commented Bradbury.
Finding a solution
Automation will be essential if firms are to achieve compliance with the FCA’s rules, as will programmes such as the STAR (Speedy Transfers and Re-registration) scheme, an industry initiative designed to make it more straightforward for investors to change platforms.
Several industry bodies including the IA are calling for the establishment and adoption of an automated, industry-wide standard to help drive efficiencies. Jeffrey Mushens, technical policy director at TISA (The Investing and Saving Alliance), said industry-wide automation would pay dividends, helping with the re-registration of assets.
Mushens added that TISA’s Share Class Conversion Group was working on implementing the guidance outlined in its recommended practices for share class conversions. Among some of the key issues include electronically identifying different unit share classes ahead of conversions to avoid unnecessary encashments and finding a way for platforms to agree on core common share classes to facilitate seamless transfers and re-registrations.
Others believe innovative technologies will be equally – if not more – instrumental in expediting asset transfers. “While automation and STP (straight through processing) will play an important role by remedying a lot of the problems currently facing the platform market, we believe that wider adoption of the distributed market infrastructure (DMI) could be extremely impactful in delivering efficiencies and helping platforms attain compliance with the FCA’s requirements,” said Sharn Rai, director of product development at Calastone.
The way forward
Laying down the foundations for an efficient and quick asset transfer process will benefit investors and the wider industry. Afterall, you only get one chance to make a lasting first impression or a lasting final impression.
In an industry where customer service could be considered a form of alpha those firms delivering a frictionless and seamless fund transfers experience could easily stand apart from their competitors in an increasingly saturated marketplace.
(1) Financial Times (November 18, 2019) UK funds still paying IFA commissions stand at £184 billion
(4) Investment Association
(5) Investment Association