Way back in December 2019, the FCA published PS19/29 – Making Transfers Simpler. The policy statement and accompanying rules were the outcome of consultation around how to make the platform market more competitive. The FCA believed a key step in achieving that was to address the finding that consumers often found it difficult to move from one platform to another because of the time, complexity and cost involved.

One of the issues found was the exit fees charged by some platforms. The FCA intended to consult on this separately in Q1 2020 and so it was not addressed in PS19/29. However, further consultation was abandoned in 2020, partly because of priorities affected by the pandemic and partly because, since initially announcing that they intended to look closely at exit fees, most platforms had ceased to charge them.

The other main issue related to ‘in-specie’ transfers and unit class conversions.

In the context of platform transfer, an ‘in-specie’ transfer is where a customer’s investments (e.g. units in a fund) are transferred directly from one platform to another, with the customer remaining invested throughout.

The new rules ensure that consumers have the opportunity to request an in-specie transfer and, where necessary, a unit class conversion, when transferring between platforms.

Summary of the FCA’s findings

• Consumers are sometimes required to liquidate their holdings to enable them to switch platforms, even though this may not be the best way for them to do so.
• Liquidating assets can lead to a tax charge, and consumers can also incur losses if the value of an investment rises while they are not invested. Additionally, some consumers are put off switching when platforms do not make in-specie transfers available, which in turn weakens competitive pressure on platforms.
• A common reason why firms do not offer in-specie transfers is the complexity that arises where there are bespoke unit classes in a fund, that is, unit classes specific to a particular investment platform. Where there is a mismatch of unit class between the ceding and receiving platforms, a unit class conversion is needed to perform an in‑specie transfer.
• Some platforms were not routinely offering the option of a conversion, thus requiring the consumer to sell the units and repurchase them via the new platform. This may sometimes lead to consumer harm due to time out of the market or tax implications. Harm may also occur if these issues deter consumers from switching in the first place.

Points to note

There may be circumstances where a consumer is temporarily converted into a unit class with higher charges, to enable a transfer to take place in specie. The FCA believes that the duration of such scenarios should be very short, so the effect on consumers should not normally be material.

Firms are expected to tell their clients about the conversion(s) that will be made as part of the transfer process, and to consider the materiality of any temporary increase in charges as part of this disclosure. Providing general information about the implications of different options (e.g. costs, timing, exposure to market movements) is not likely to constitute regulated advice.

However, where a client is acting on advice, the adviser should provide sufficient information to ensure that the appropriate unit class is selected. As is the case for any replacement business, advisers will also have to provide justification where they recommend a more expensive unit class, e.g. where this is needed to maintain the integrity of a model portfolio.