Post-RDR, the UK investment industry is facing a proliferation of share classes in a competitive and increasingly transparent market. Prior to the [FCA sponsored] TISA cross industry re-registration initiative, transferring assets between platforms was painfully slow and inefficient. This usually required the investor to redeem their assets on the ceding platform and then acquire the same assets again on the acquiring platform, often taking months to complete with the investor ‘out of the market’ for a prolonged period of time.
One of the key issues which the TISA initiative intended to resolve was to enable investors who wished to retain the same assets, but have them administered via a different platform, to transfer those assets to the new platform rather having to redeem and then rebuy them.
The huge strides made by TISA, including agreed common standards and associated service level agreements (SLA), have been impacted by the subsequent decisions by the FCA to place an end date on the ability to pay rebates to platforms and the HMRC’s stance re the taxation of these rebates paid to investors in the meantime. The vast majority of platforms had agreements in place to receive rebates of a proportion of annual management charge (AMC) from the underlying fund managers. However, the amount of rebate would typically vary from platform to platform, reflecting each platform’s buying power with that specific fund manager. These AMC rebates received by the platforms would in turn be passed on to the investor also in the form of a rebate or as a loyalty bonus.
These decisions have caused the industry to review their approach and the fallout has seen platforms demand that their underlying fund managers provide exclusive platform specific share classes, with AMCs that mimic the platform specific rebates; for example, a ‘clean’ share class (0.75% AMC, available to all), or a ‘platform (super clean/exclusive) share class’ (ranging from 0.50% – 0.65% AMC available to a select few).
If this platform exclusive share class model is widely adopted, it will lead to fund managers having to support and administer a proliferation of share classes where the ‘version’ of the asset on one platform is not the same as on another. This is problematic when the investor’s holding needs to be transferred and converted or alternatively converted first and then transferred. How the industry manages this is still being decided.
TISA has continued to hold regular meetings around this issue, widely attended by a cross section of the industry including end distributors, platforms, fund managers, fund accountants and solution providers. All parties are working together to find a standard approach to this re-registration and share class proliferation conundrum with a target date of April 2014 in mind.
The model being considered will see the ceding platform (the one marketing an exclusive platform class) being responsible for the conversion to a non-exclusive share class prior to re-registration. The acquiring platform will subsequently convert from this standard platform class to their own exclusive platform class if appropriate.
It is an attractive proposition in that it will make use of processes which broadly already exist across the industry. However, it requires platforms to hold the standard share classes as well as their exclusive versions and ultimately may mean that two separate conversions are needed.
With the introduction of exclusive classes only offered through certain platforms, there is also a need to be able to access information about the linkage between share classes (e.g. to determine that the share class owned on the ceding platform is a platform exclusive version of a generally available platform share class) and to make this fund and asset data more widely available. Whether one organisation will be responsible for this fund data repository or whether a selection of fund information services will spring up is yet to be seen.
This model does present several issues to platforms:
- Each platform will not only have to hold its own exclusive platform specific share classes, but will also have to hold the generally available platform version of the share class (i.e. the share class with the ‘factory gate’ AMC). Ceding platforms which market exclusive platform share classes will have to manage holdings in standard platform share classes which are only retained for a transient period before they are re-registered, and acquiring platforms will also have to manage a similar challenge prior to a final conversion to their exclusive platform share class.This will result in more day-to-day work. For example, the share classes will have to be priced according to whether they have received deals or not. Dependent upon the degree of system automation, some manual effort will be required to close out dealing periods per share class each day.
- Even though the investor will only hold the transient share class for a day or two, statistically there are going to be some holders who will own the shares at the distribution period end and who will be entitled to a distribution on their transient holding. This means that the platform will need to run distributions on these ‘transient’ share classes.
Once a model is agreed upon, the general consensus is that straight through processing (STP) will be next on the agenda, with a view to making real change by 2016. The new re-registration and share class conversion model lacks compulsory automated transfer. Whilst the current target for transfer between platforms stands at a respectable 11 days (a vast improvement), this SLA is predominately based around manual processing. True STP back office integration could theoretically reduce this to just one or two days for stock re-registration, or three days where a redemption (cash transfer) is required. This will benefit investors who find their assets tied up during the transfer window.
It isn’t the IT systems which cause the lag. The real time crunch is in all the administrative paperwork and manual input which accompanies the process, a high percentage of which is still delivered by post. True STP, which connects to back end systems and does away with the need for manual data input, can significantly change the way the industry does business. But it requires technology investment from all parties involved in the process.
The industry must find a working share class conversion and re-registration solution upon which all parties agree. Significant progress has been made. Different providers will offer their solutions and be able to compete within this space, but overall harmonisation of standards is essential. If the industry doesn’t take the lead and make the move, the FCA will. The TISA Exchange Limited (TeX) contract club has adopted the current ISO 20022 messaging standards for re-registration. It would be reasonable to expect this to be extended to support the tweaking required to facilitate transfers that include platform exclusive share classes, and any necessary legalities for such message exchange.
By Andrew Palmer, Rufus Product Manager, Bravura Solutions