Share class conversions in the spotlight______

Ross Fox

The impact of the Financial Conduct Authority’s new Consumer Duty rules is reverberating around the industry and thoughts on fees, levels of investor protection and service delivery are growing inserting themselves into minds. And in one particular area – share class conversions, where investors transfer from one class of share to another better suited to their needs – the FCA has signalled its intent to ensure the industry ups its game.

Intense area of activity for many funds

Share class conversions are a well known aspect of the funds industry. But, as a survey conducted by Calastone recently showed, they represent an intense area of activity. Firms said they conducted many thousands of conversions a year – up to 50,000 in one instance. Yet in the great majority of cases this is all handled manually.

The volumes reflect a mushrooming in the number of different share classes fund managers have offered in the past decade or so. Now investors may be advised to switch to a different fee structure or fund. Each firm has a burden to carry, yet it is interesting to see the FCA call out the transfers process as a worked example of its impact.  

The FCA has questioned whether the funds industry gives enough support to share class conversions. It has been a focus for a number of years when they mandated that fund firms must support SCCs for their clients and now the expectation is that they will soon be looking into how efficiently these are being supported.

Survey demonstrates scale of manual workload

Our survey threw up a number of interesting findings. As I’ve mentioned, one was the sheer volume of conversion requests funds received. While a tiny minority of firms had at least some automated systems to deal with this, most relied entirely on manual processing. Almost half needed four or more people (full time equivalents) to manage the workload.

Not surprisingly, around two-thirds of respondents said their number one challenge was avoiding errors when rekeying data. Also problematic was the time spent chasing up progress reports on individual conversions. There was also the matter of searching for the appropriate share class into which to convert. Neither leads to efficient outcomes for investors as they can’t get timely status updates on their conversion nor will they always end up in the best class available. Naturally, this undermines the duty of care to consumers.

There is another challenge, too. Wherever possible, it is important to avoid having to redeem the investor’s shares before converting into the new class. Being out of the market for any length of time adds risk to the whole process.

But without a guarantee that a share class conversion can go ahead without a redemption, investors may well be deterred from making any switch that could involve a different platform or fund provider.

Automation continues to present itself as the answer

Calastone was asked to build a neutral share class conversions solution that would allow firms to fulfil this investor requirement with any market participant. In the process we surveyed the market to understand its needs and developed Calastone Share Class Conversions to process any number of share class conversions. It digitally connects with any industry partner to afford a streamlined and transparent process so that everyone involved can see the status of a conversion as it progresses. There is no more ‘chasing up’.

Importantly, there is no more need for a redemption before the investor gets reinvested in another share class – whatever they might be invested in.  A central part of the service is a solution to deal with asset transfers where two platforms have different unit classes. It obviates the need for a sale and then a purchase.

Step-by-step, the industry needs to get to where the FCA wants to be

Calastone Share Class Conversions simplifies the whole process and helps speed it up. For investors, it provides access to the widest range of fund options.

One interesting finding from our survey was that a significant number of respondents said automation would improve the outcome for their investors. That is hardly surprising but it should be music to the FCA’s ears.

Step by step the UK fund industry has automated to improve its processes and reduce costs and risks. By and large it is a story of incremental changes rather than a big bang-style revolution. Automating share class conversions is another of those steps – but with consequences that should delight both finance departments, the regulator and the investor.

Ross Fox, Head of UK & Europe

Calastone Share Class Conversions Intro

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Factsheet - Share Class Conversions
Q&A on Calastone Share Class Conversions with Sharn Rai, Product Development Director
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