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Making informed decisions - With the April 2016 implementation of the sunset clause now just months away, Nucleus, the UK’s first adviser-built wrap platform, reminds advisers they face a threat to their income if they do not act – and an opportunity to boost client relationships if they do. This article is an edited extract from Nucleu’s new white paper, The sunset clause: Making informed decisions, which you can download here
The Sunset Clause
At the time of writing, we are six months away from the end of the ‘sunset clause’, a term that was coined by the FCA in its Policy Statement 13/1 – Payments to platform service providers and cash rebates from providers to consumers – published in April 2013 and effective from 6 April 2014.
The content of PS 13/1 has been well documented but it is worth a quick reminder of what the FCA set out to achieve. In summary, the new rules were intended to restrict the influence product providers may have had on distribution and to introduce greater transparency of costs to consumers to ensure platform charges are known and understood, allowing for easier consumer comparisons.
This came in two forms:
- The banning of payments from fund managers to platforms for platform services in favour of an explicit platform charge made to the consumer directly by the platform; and
- The banning of cash rebates to consumers from fund charges (subject to rules around an acceptable cash de minimis level of £1 per fund per month and the introduction of unit rebating.)
Since April 2014, all platforms have been required to clearly disclose to end-investors the specific cost of each part of the value chain:
- The cost of platform services
- The cost of any associated product wrappers
- The cost of advice
- The cost of ongoing fund management
… for all new business… and this is where the sunset clause kicks in.
PS 13/1 acknowledged that moving all consumers’ assets to a platform charging basis within a year from the introduction of the rules would be operationally challenging and so introduced a transitional period allowing platforms to continue to retain legacy payments for existing business subject to a two year ‘sunset clause’, which expires on 5 April 2016.
For those advisers who made an early transition from commission to fee-based charging, it is likely that much of this transition is already complete. The Nucleus Census from February 2015 would validate this sentiment suggesting that 87% of Nucleus advisers generated less than 20% of their business revenue from commission.
A more recent survey from Fidelity, however, would suggest this picture is perhaps less positive across the wider industry, with the report stating that over a third of firms (34%) still received over half their revenue from trail commission. For those who retain significant proportions of their business in legacy assets, there is a very real danger to ongoing revenue that needs to be addressed well in advance of April next year.
But revenue is only one side of the equation and firms that believe there is only a minimal impact from the sunset clause on revenue must ensure they understand the knock-on effect it might have on profit. Equally, the sunset clause presents a great opportunity to re-evaluate and perhaps revive some legacy relationships and it is likely that any attempt to do so would only lead to better client outcomes.
Where the intention is to retain legacy assets either on standard service terms or on a completely new service model, the additional cost of servicing these relationships must be well-known and understood on the bottom line. The positive news is that there is still sufficient time to take action and the Nucleus white paper considers the key issues facing advisers at this time, how the changes impact across each part of the value chain and what action needs to be taken.
Threat and opportunity
The April 2016 implementation of the sunset clause is almost upon us. Apart from any income covered by the comparatively narrow definition set out in this change, advisers are experiencing, and will expect to further suffer, additional cuts to their income as other providers seize the opportunity to switch off trail income on legacy products, without passing on any of the significant savings to clients.
Taken together, the main threat here is clearly a loss of income that may not be fully offset by a reduction in costs. That said, there is a real opportunity to transition at least a proportion of the clients affected into a more appropriate environment that, if revenue, profit and servicing issues are all fully understood will benefit both parties.
The FCA is, at present, much more focused on transparency and client engagement than directly on costs themselves. This may change, and so advisers do need to be very clear that any additional costs incurred by changing their clients’ portfolios are clearly explained and are in the client’s best interests.
As ever, successful transition of these changes will depend on:
- A clear action plan
- Good project management
- Sound market information and client data
- Effective communication with all affected clients
- The ability to put clients interests first. Always.