Share Class Conversion: A Little Guidance, A Lot More Confusion

Last week the regulator published their Guidance Consultation on share class conversion. Sadly, it’s pretty thin on any real guidance, especially for advisers.

It confirms some things we already know;

  1. That platform can carry out share conversion without express written authority from clients, although they have to notify clients and give them a chance to opt out.
  2. That share class conversation does not constitute advice, when carried out by nominees/platforms

However, the FCA pulled out a rabbit out of their old rule book by reminding us of the ‘clients best interests rule’ which in effect, trumps everything else.  Given how some platforms have reacted, it’s apparently not a rule that they are familiar with 🙂

This is how our friends at Canary Wharf interpreted that rule in this particular instance;

It is our view that under this provision and Principle 6 of the Principles for Business, a conversion should take place only if it is fair and in the client’s best interests. We would expect in most cases that the clean unit class would be exactly the same as the pre-RDR class, with the only difference being the reduced annual management charge. However, if this is not the case, and if a client is in any way disadvantaged by such a conversion, we would not expect that conversion to take place – so we would expect the effect of the conversion on clients to be considered.

In English, this means that if the clean share classes are more expensive than the bundled equivalents, the conversion can’t go ahead. Presumably, this effectively throws plans by Standard Life, Ascentric, Novia  et all to convert clients to clean/superclean out of the window, unless they can absolutely ensure that its cost neutral to clients – not just in the current year but for the foreseeable future?.

Others like FundsNetwork have already announced their intention to stop trading the bundled share classes by as early as December. This creates nightmares for advisers trying to rebalance existing portfolios and presumably forces advisers to recommend a conversion or switch (which is a sale and repurchase as opposed to conversion)

One interesting question is this; where the clean/super share classes are available on platforms at lower costs, are platforms obliged to act in the client’s best interest and move them into this? Are you getting this picture? I mean, all that muscle-flexing to get exclusive Super Clean deals….  well, how is working out so far?

Strangely, reading the paper, you get the impression the share conversion is really a matter for platforms and reference to ‘advisers and their role in the conversion process’ is merely an afterthought. Experience in the real world  however suggests the contrary.

Some platforms have in effect left this decision to convert clients to new share classes to advisers. Even where the action is to take place as corporate actions, it is still down to advisers to opt clients into the process. My understanding is that where advisers instruct the conversation, it will count as advice, which means you will probably have to get client consent and presumably provide cost comparison, together with justification why conversion is recommended.

If advisers recommend a switch (as opposed to conversion), ISAs and pensions are fine but there are CGT implications for GIAs. This is not necessarily a problem where gains are below the CGT allowance and client will otherwise not use their annual exemption. The problem is the huge admin issue the create for advisers.

The other option of course is to sit thigh and do nothing for now. Whichever way you look at it, I see no plain sailing for advisers.  Sorry.







Abraham Okusanya
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.

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