With RDR imminent how ready is the platform market for the changes it will bring? Rob Kingsbury spoke to platform providers and Financial Planners about the issues they see affecting the market in the future.

Regulatory consultation on the platform market has lagged behind other areas of financial services in relation to RDR. This has placed greater strain both on the platforms and Financial Planners looking to have their systems and processes in place and operational by the 31 December 2012 RDR deadline. With the latest FSA platform consultation paper, CP12/12 having been published in June 2012 but currently no stated date for the policy paper, there remain several issues to be finalised and it is clear that in some areas platforms and Financial Planners will need to have an extended RDR deadline.
Chris Jordan CFP^CM of Heron House Financial Management considers the delays will leave Financial Planners without the answers to a range of issues that from a business point of view they need to have addressed sooner rather than later.
He said: "The FSA has admitted it was behind the curve in regard to platform regulation which is why it conducted its thematic reviews. These revealed the issues it is now trying to resolve, particularly in respect of transparency. As a consequence, when RDR comes in January it is not going to be clear cut as far as platforms are concerned and there will be ongoing issues."
A key issue arising from CP12/12 is the FSA's proposal to ban platforms from holding cash rebates from product providers. Mr Jordan sees this as a "huge issue" for the Financial Planner community given the high percentage of planners who use wraps.
Typically, rebates from product providers have been held in a client's wrap cash account and used to pay the fees for both the service and the Financial Planner.
The FSA proposal, as outlined in CP12/12, is that starting on 1 January 2014, instead of giving platforms rebates in cash, product providers should pass them on to the client in the form of additional units. For the fund supermarkets this is not an issue, as in general they do not hold client cash accounts. For wrap platforms, however, it creates significant administrative and systems issues that in turn will also affect Financial Planners used to running their wrap accounts in a certain way.
Hugo Thorman, chief executive of wrap provider Ascentric, has been an outspoken critic of the ban on cash rebates and believes it will act detrimentally by creating administrative confusion for client, Financial Planner and platform alike.
"As the system currently works, the fund manager will charge, for example, 1.5 per cent annual management charge (AMC) and they will then rebate 0.75 per cent in cash, which is paid into the client's cash account, from which the platform charges and Financial Planner's fees are paid. From January 2014 this will no longer happen. The client will be paid in units, which is going to be incredibly complicated to start with, and then in order to pay the platform and the Financial Planner units are going to have to be sold," he said.
"At the same time, the creation of what are being called 'clean' share classes by fund managers, for example with an AMC of 0.75 per cent, which means the platform is going to have to be selling units on an almost constant basis in order to pay the platform and the planner, or the client will have to be asked to pay cash into the account to cover the charges.
"It could end up costing the client more but perhaps the greater challenge will be how all of this is reported to the client."
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Mr Jordan concurs that there will be issues for all concerned. "Clients are not going to understand how the new system will work, and I would argue that many Financial Planners might not understand the consequences. When a client needs to sell units into the cash account which units do you sell? If the client wants to take money from their portfolio under capital gains exemption rules, which units are the best to close?" he said.
"Is the platform going to provide Financial Planners with the detail and the data in the right format to allow us to identify the best deal for the client? That's an outstanding issue. It is going to take Financial Planners time to think this through to ensure we get it right for the client."
Pete Wyatt, head of Platform at Seven Investment Management (7IM), said the company is unlikely to go down the unit rebate route, instead, it will move to use clean share classes. "We're looking at how we can best implement this and we are talking to intermediaries, our custodian, and fund management houses about it."
In practice this is likely to require encashment of investment holdings or money to be paid into the cash account to meet platform or Financial Planner charges. It will also require that all the funds clients want to use will have clean share classes. Mr Wyatt does not see that as a problem. "We are finding that a growing number of fund managers are willing to create clean share classes where they haven't got them already and we are adding those on as they appear. At the same time, we have always run institutional clean share classes on many funds so there are many funds and portfolios that won't be affected," he said.
"Another point to make, is that moving to a clean share class does not create a capital gains tax event, so it can be done without tax liability arising," he added. "The challenge is the process involved in making the change."
Alongside the cash rebate ban, the need for what is termed 'adviser charging' has been another layer of change required to ensure the industry is ready for RDR come January.
Various platforms have been announcing their readiness for RDR in recent months. Standard Life went fully live with 'adviser charging' on new business on its key products in October.
Graeme Bold, Standard Life director UK Retail RDR, said the group had specifically aimed to implement RDR requirements before the end- of-year deadline "to help advisers make the operational changes needed to avoid any last minute teething problems which could leave them closed to new business at the start of the New Year."
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London-based Capital Asset Management has the bulk of its clients on Standard Life, or off platform, and chief executive Alan Smith said the early launch and the ability to implement and test the system ahead of time has been "very useful". Likewise, he commends the training and education provided by the platform. "It was extremely important to get everyone in the firm prepared, the admin staff as well as the planners, to understand the trigger events and to ensure we have the appropriate client agreements in place. When you start digging down there is a lot of detailed information that is needed and we had to roll up our sleeves and look at all our clients individually to see how they might be affected," he said.
AXA Elevate announced its 'adviser charging' structure in June 2012, which applies across the bulk of its products. Mark Wilson, head of product at AXA Wealth, said the platform accommodates the full range of adviser charging, initial and ongoing – on a percentage or fixed fee basis - and ad hoc specific charges for additional work.
An area Mr Wilson flags as one "Financial Planners are going to have watch out for from next year" is the abolition of pre-financing. This is the ability for planners to pre-fund adviser charging, allowing platforms to meet the charges without there being sufficient cash in the client's cash account to cover it.
Mr Wilson said: "From January 2013, providers will no longer be able to do that, so planners will have to facilitate cash being placed in the account or they will have to be more active in managing the client's cash. This will be exacerbated by the ban on cash rebates which to date have provided liquidity in clients' accounts.
He continued: "Our RDR preparations allow for the full range of options to help manage the cashflow. This includes the ability to set up regulated, automated sub orders to encash units to cover the charges as and when they fall due; or planners can manually manage the cash; or using an automatic disinvestment functionality the planner, with the agreement of the client, can elect to automatically disinvest across certain types of assets. A further tool will also let them automatically set up either a last- in, first-out disinvestment, or least volatile stock disinvestment."
A particular area of concern for Financial Planner Mark Cherrill, partner at Incisive Wealth Strategies LLP, and one he believes may have not been adequately considered in the lead in to the RDR deadline, is exactly what Financial Planners will have to do to provide evidence to the regulator of the effect of their ongoing service to their clients.
Mr Cherrill said: "Under RDR Financial Planners should be monitoring their investment performance for clients against benchmarks, to show the impact of their advice.
"The only way that can be done is with proper, time-weighted reports to clients, either quarterly, half yearly or annually - and not online but by giving clients printed, paper copy that is tangible proof of service. "I think that down the line the regulator will be asking Financial Planners to do just that."
Another issue that has been discussed regularly over the past few years and which planners have an eye on, is potential consolidation among platforms. As more and more providers have piled into the booming market – there are now close to 30 providers ranging in size and backing in a market worth just under £200bn – the question is, at what point does the tide turn and the market start to consolidate? Mr Jordan, believes consolidation in the wrap and platform market may well cause problems in the future for many Financial Planners. "There is always the chance that a big fish in the pool or one looking to enter it, may well acquire one or more companies. At that point, Financial Planners would then have to decide whether the new owner was suitable for their business," he said.
He added: "This is an issue we have highlighted to our clients as part of the due diligence process and advised them that, after appropriate review and due diligence, should we feel unhappy with the new owner we would have no hesitation in carrying out a novation and move our clients en masse to a new platform."
However, Mr Wilson believes while it is logical to assume there will be consolidation of the market at some point, the market is not yet fully mature so it may not happen for some time." The other point is where the value is in the platform market," he added. "It doesn't lie with the platform as such, it lies with the client which in turn lies with the Financial Planner. This and the potentially prohibitive costs of systems integration may limit M&A activity in the platform market," he said.
To what extent the industry is truly ready for RDR will not be known until January 2013 and beyond.
"It's the size of the shift that is being required that makes it impossible to say just how prepared the market is for RDR," said Mr Thorman.
He added: "Companies are announcing that they are RDR ready but some 75 per cent of new business is still being written on a commission basis – around £60bn a year being handled by life companies and platforms. That has to come to a dead stop and the next day completely move to adviser charging. That's a huge tanker to steer in a different direction. We can assume there will continue to be issues for the market to address as we move through 2013."

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