Sunset clause prompts review of fund managers’ legacy charges


Fund manangers are reviewing their direct client books over concerns the sunset clause will put them in breach of treating customers fairly rules.

Fund managers are considering slashing their charges at the cost of tens of millions of pounds in revenue as the sunset clause will expose the higher fund management charges paid by legacy customers.

Some are also looking to build their own platforms or front-end technology in a bid to demonstrate to the regulator they have made customers aware of what they are paying. Money Marketing understands M&G is implementing a platform powered by FNZ to serve its legacy clients.

So why is the sunset clause proving such a challenge for fund managers? And where will these changes leave them and their customers?


Under the sunset clause, the FCA has banned all legacy payments bet-ween fund managers and platforms by April 2016. Cash rebates and fund manager payments to platforms are banned on new business.

This has sparked a move to clean share classes, typically with a fund management fee of 75 basis points.

But fund managers have tens or, in some cases, hundreds, of thousands of non-advised legacy clients paying 150 bps on Isa and Pep funds.

These books were built up in the 1970s, 80s and 90s through off-the-page advertising.

M&G has 300,000 direct clients, while JP Morgan has 100,000 clients worth £660m. Blackrock says it has a “very small” number of direct clients, but refuses to give further details.

EY senior adviser Malcolm Kerr says: “There are fund managers with significant direct legacy business dating back as far as the 1970s when it was possible to buy funds by just clipping a coupon from the newspaper and attaching a cheque.

“Some investors will have transferred to new unbundled funds since then; others will still be paying 150bps.

“This is likely to be a source of concern to managers who will no doubt be considering what, if anything, they should do as the sunset clause approaches and transparency becomes the norm.”

The Lang Cat principal Mark Polson says: “If the client is awake and breathing, they will find out very quickly they could hold the fund for 75bps plus a platform charge instead of 150bps. So although fund managers are not technically caught by the sunset clause, they may as well be.”


Direct platform charges typically range from 25 to 35bps, depending on the amount invested.

Investment consultancy gbi2 managing director Graham Bentley says: “While you do have a platform charge on top of the 75bps, the question clients will be asking is: ‘Why am I paying 30 40bps on top of that?’ Most fund managers will find their 150bps charge extremely difficult  to justify.”

A senior source at one major fund manager admits firms do not know what it costs to service legacy clients.

He says: “We have to do some work to calculate how much it costs to service these customers – we have never really worried about breaking all this down before.

“Fund managers are being prompted to review their books by the sunset clause, the regulator’s TCF work and its work around the RDR and orphan clients.”

Experts warn fund managers could be in breach of TCF rules if they fail to communicate the  impact of the sunset clause or are unable to justify their charges.

Former FSA head of retail policy and regulatory consultant David Severn says: “At least two of the TCF principles apply here. The FCA says consumers must be provided with clear information and kept appropriately informed before, during and after the point of sale. So the least a manager ought to do is tell customers.

“The regulator also says consumers should not face unreasonable barriers to switch product or provider, so fund managers should make customers aware they could switch to lower charges.”

He adds: “If any fund managers are approaching this from the angle of the regulator making them do something, then they have not really understood good customer relations, let alone abiding by the spirit of TCF.

“Imagine one of the personal finance journalists on the national newspapers doing a piece on charges and pointing out a particular manager is charging customers a lot more than needed. That would damage the reputation of the manager and risk them losing existing customers.”

Revenue hit

The impact of cutting charges on fund managers’ revenues would be stark.

Kerr says: “Switching clients into 75bps share classes is one option, but that would reduce existing revenues by 50 per cent. On a £5bn back book that’s £37.5m per year: serious money.

“Direct clients can cost more to service than those introduced by advisers. Perhaps a case could be made for switching them into a 100bps share class, which would at least mitigate the impact on the profit and loss to some extent. Doing nothing is another option, but would that be fair? Whichever way you look it’s a challenge.”

The alternatives also look expensive and unattractive.

Money Marketing understands M&G is implementing a platform which it plans to move legacy clients on to, while rival fund managers are looking at alternative front-end technology solutions.

The fund manager source says: “Firms are looking at whether we can give customers online access. But those systems are expensive and it is not our area of expertise.

“Attempting to move customers en masse to a 100bps share class brings its own challenges, however. You might have to write to all those customers to get their consent.”

Outsourcing the book is another option. In July, Jupiter transferred its investment trust business – comprising 5,000 retail clients and £60m worth of assets – to Hargreaves Lansdown.

Polson says: “You can put some kind of online platform structure in place to allow people to interact with their savings and choose to convert them if they wish.

“But one of the great concerns fund managers have is these back books of business are very stable. They’re worried if they start talking to people about it and giving them more access, they will disturb the assets and scare them off.

“Fund managers are also really bad at looking after retail clients because it is just not their business to be dealing with Mrs Miggins. Sometimes they would rather sell the book than have to deal with it.”

Expert view: Fund managers face embarrassment of having their charges exposed

Fund managers are facing the embarrassment of having charges twice as high as elsewhere. The sunset clause will make that difference striking, and customers will be asking how long have they known about it and why weren’t they informed so they could look elsewhere?

The fund managers can argue it is not their place to do that, but frankly that is not treating customers fairly. The regulator wants firms to put customers at the heart of their business: fund managers will struggle to demonstrate this while they have these kind ofcharges.

Firms have a number of options. Some are looking at selling their back book to a platform, but that is only really viable for those with medium-sized books. For a firm like M&G, there is too much money at stake to sell it off.

Fund managers know they have to put something in place before the sunset clause takes effect. The temptation will be to bite the bullet by cutting their fund charges and watch their revenue collapse. The alternative is to find some kind of halfway house, perhaps through the use of online tools and trading functionality. A lot of fund managers find dealing with customers directly a bit of a chore. Quietly, most of the senior people in sales and marketing for fund managers do not see investors as the clients – they see clients as distributors or fund of fund managers.

It comes down to what is the cost of running the money? Investors approaching retirement have experienced a remarkable period of returns, but as they start to take an income, the charges are going to make them sit up and take notice.

While you do have a platform charge on top of the 75bps clean share class, the question will be why am I paying 30-40 bps on top of that? Most fund managers will find their 150 bps charge extremely difficult to justify.

Graham Bentley is managing director of investment consultancy gbi2

Adviser view

Ian Thomas, director, Pilot Financial Planning

The sunset clause targets part of the industry but ignores other parts. There are TCF issues with fund managers’ charges and it is welcome to have that highlighted, but this is just scratching the surface. Legacy pension funds are rife with high charging products that wouldn’t cut the mustard today.