HSBC Securities Services has launched a first-of-a-kind solution which will see it handle the on-exchange dealing and fractional trading of ETFs on behalf of UK fund platforms which are existing custody clients of the bank.
The new offering is in its infancy, according to a person familiar with the plans, but its arrival will be welcomed by advisors, model portfolio providers (MPS) and issuers who have long called for access to ETFs on equal terms to traditional funds.
Such a solution could prove very impactful given the current technology gap which prevents UK investors from accessing ETFs as easily as traditional funds, which has been a key barrier to more of the hundreds of billions of pounds invested through platforms entering the wrapper.
While investments in traditional funds are handled through the back-office transfer agency (TA) process, ETFs are executed in the secondary market, requiring on-exchange brokerage capabilities that platforms often have to outsource at a cost which is passed back to end investors.
Some financial advisor networks and MPS choose to operate on the small number of platforms with no ETF dealing charges – or those that waive charges on a case-by-case basis.
But many buyers and sellers work across an array of platforms, meaning they are bound to incur a dealing fee for investing in an ETF as they would an individual share, which risks creating inconsistent client outcomes as these charges are applied every time an MPS rebalances on platforms where such charges exist. By contrast, MPS using mutual funds do not incur these fees.
There is also the problem of ETF unit size. While traditional funds can be bought at any notional size, ETFs bought on platforms without fractional dealing capabilities can be priced at hundreds of pounds per share. This means smaller investors in ETF-based MPS risk having large chunks of their portfolio parked in cash until they can afford to buy more shares of the underlying ETFs.
Similarly for clients that want to withdraw their money, the absence of fractional dealing means advisors have to manually select ETF units to sell off, meaning clients might not receive the full withdrawal they are hoping for.
HSBC is looking to offer a solution to these issues with its new omnibus custody and execution offering.
While the bank’s securities services arm will continue to handle the custody of assets on behalf of platform clients, its equities business will perform on-exchange and fractional dealing. Rather than charging UK platforms and their clients separately for execution, custody and execution for ETFs will be rolled into one service with an all-in fee custody fee.
Calastone is acting as a technology partner on the new offering. The fintech – which already has an established presence in the UK fund industry – will send instructions between platforms and HSBC, whether a TA for traditional funds or an ETF execution, to minimise friction and create an equivalent experience when investing in either structure.
The initiative is an astute move by HSBC which now has an enticing angle to attract new clients into its ETF custody business at a time when other banks and technology companies are vying to bring similar solutions to the UK market and potentially unlock a wave of new ETF investors.
HSBC’s new project will raise pressure across the industry to open similar corridors for access and large UK fund houses entering the wrapper – Royal London Asset Management, Schroders, M&G – to use their brands to educate investors on its advantages.
