St. James's Place plc (STJ) Earnings Call Transcript & Summary

Good morning. I'm Paul Manduca, Chair of St. James's Place. Welcome to this briefing where Andrew and Craig will describe some important changes to our charging structures. We believe these changes will further strengthen our market-leading position in the U.K. financial advice and wealth management landscape and deliver long-term benefits for all our stakeholders. Before I hand over to Andrew and Craig to take you through the detail of the changes and the financial implications, I should like to take this opportunity to pay tribute to Andrew who will shortly be retiring from St. James' Place after 31 successful years with the business. You will, of course, be hugely missed by the entire SJP community. And on behalf of us all, I wish him the very best for his forthcoming retirement. We announced some weeks ago that Mark FitzPatrick will succeed Andrew as Chief Executive on the first of December. Mark joined the business at the beginning of this month, and is immersed in an extensive handover and transition. Mark fully endorses what we are announcing today and is looking forward to taking the business forward. Today's changes complete the review of our charging structure, that followed from the work performed to address consumer duty. That puts us in good shape for the future. And so I'll now hand over to Andrew, who will explain why that's the case.

Thank you, Paul, and good morning. Earlier today, we announced that we've concluded an evaluation of our charging structures and made the decision to affect changes for the future. I will talk in more detail about what those changes are in due course. But to summarize, we're simplifying our bonds and pension structures, including removing early withdrawal chargers or EWCs. We're separating our charges into their component parts, and we're rebalancing our charges across each element of our proposition. I will also talk in more detail about why we've made these changes, touching on shifting consumer trends and how they've been reflected in an evolving regulatory landscape over time. And I'll talk about why I believe this is really positive for the business, setting us up with a sustainable and competitive charging platform for the long term that will see SJP thrive. I'll start, though, by setting out some background to these changes. We've been in business for over 30 years now with a model that has delivered strong client outcomes as we've established ourselves as the leading provider of a financial advice in the U.K. with GBP 158.6 billion of funds under management and retention rates of over 95%. As we look to the future, we continue to see a fantastic market opportunity ahead. The demand for advice is growing driven by a very large savings gap in the U.K. The persistent complexity of the U.K. savings, tax and pensions regimes and of course, the challenge of managing and optimizing into generational wealth transfers. All this at a time when there is already an acknowledged shortfall of qualified financial advisers in the U.K., creating an advice gap which is expected to widen only further. For an ambitious business, with a clear direction of travel, the opportunity is clear. Our industry is always evolving and in order for us to stay the market leader over the long term, it is important that we continue to adapt to changes in client expectations and the regulatory landscape. In recent years, we've invested heavily in a number of areas, including technology to improve services for clients and better support partners in our investment proposition and in the evolution of our brand. Consumer duty puts good client outcomes at the heart of the financial services industry, something that we have always believed to be of the utmost importance. Expectations will continue to evolve with a focus on simplicity and comparability across financial services. Against this background, we have built on our consumer duty work and completed a more comprehensive evaluation of our charging structure, and evaluation, which has now concluded. The principal purpose of this work was to reinforce our position as the best place for clients to build strong financial futures. To do this, we looked at our charging structure through 3 key lenses: first, simplicity. Ensuring our charges are easy for clients to understand and easy for our partners to explain. Second, comparability. Making it clear what services provided as part of each charge so that clients can more easily compare across the industry. And finally, and most importantly, value-focused. Ensuring our charging structure highlights the good value that SJP provides for clients with our high-quality service. By ensuring that our renewed charging structure meets each of these points, we will be well placed to continue to lead the market into the future. To meet these criteria, we are making 3 key changes that will come into effect during the second half of 2025. First, at the point of implementation, we will be removing the EWC mechanism from all future new business. Instead, new bond and pension business will continue to operate with an initial advice charge, but no initial product charge. Ongoing product and advice charges will apply from the outset, and there will be no 6-year gestation period. Existing bond and pension investments will, though, continue to operate with an EWC mechanism as applicable until these naturally expire. Following which, there will be no further EWC is applicable to any business. This change for bonds and pensions will better align our charging structures across our investment wrappers simplifying our proposition for clients. Second, we will be separating our charges, outlining them in their component parts, being advice, product and investment management. This will make it easier for partners to explain charges to clients at the start of their relationship and in turn, for clients to review and compare as part of their decision-making process. particularly against competitors that do not offer the same fully integrated service that we do. And finally, in separating our charges into their component parts, we will be able to rebalance our charges to better align with where clients receive value across the components of our service proposition. As well as introducing tiering for larger investments on ongoing product charges. So what is the outcome of these 3 key changes? While the individual client impact will depend upon the product wrapper and the duration of each investment, the resulting level of client charges across all wrappers will continue to compare favorably with competitor rates available in the marketplace, representing good value for the high-quality financial planning service that our partners provide. These changes will reduce complexity in our product structure, improving comparability and will support our brand and reputation broadening SJP's appeal over time. This will set us up to maintain our market leadership over the long term and future-proof the business as industry dynamics and client expectations change. Moving forward, with the sustainable new structure, SJP will be well placed to capture the significant opportunity ahead for the advice market. I'll now take a moment to illustrate what the new charging structure looks like after the changes that we have announced today. Starting with our unit trust and ISA wrapper. As you can see from the slide, we have further improved the value that we offer to clients by reducing both our initial and ongoing charges, whilst moving from a bundled charge to one which clearly separates into the 3 component parts of our ongoing service. To keep things simple, what we've illustrated here is what the charges would be for a new investment of GBP 100,000 into one of our most popular funds. The wrapper would include an initial advice charge of up to 4.5%, though in practice, this will vary with the size of the investment and the complexity of advice required. After this, an ongoing charge of 1.59% will apply in each year, though there will be some variation based upon the choice of investment funds. Going forward, SJP will continue to retain product charges, but we'll also retain a proportion of the advice and funds charges, reflecting the group's activity across all of these areas. Craig will take you through what this means for the financials shortly. Turning to the structure for our investment bond and pension wrapper, where we are implementing more substantial changes, harmonizing with the structure of our unit trust and ISA wrapper. The only difference between the wrappers being a slightly higher product charge here, reflecting the higher administration requirements of these products. This means from the point of implementation, new investment bond and pension business would no longer operate within EWC, resulting in a different pattern of contribution to the cash result. Compared with our current model, initial charges will be lower, while the introduction of ongoing product charges applicable from the outset means that ongoing charges will be higher for the first 6 years than they are today but then lower thereafter. Again, the resulting level of client charges will continue to compare favorably with competitive rates available in the marketplace. Finally, the split of charges between components has been rebalanced towards advice charges, reflecting the fact that the advice lies at the heart of the value SJP delivers for clients. The changes that we're announcing today will be completed in the second half of 2025, but our change program will be structured in such a way as to safely deliver improvement in value as the program progresses. Craig will touch on the cost of this implementation program shortly. So just to recap, we've announced today several key changes to our future charging model. These provide us with a sustainable and competitive charging platform that will help us in our ambitions to maintain our position as a leading financial advice business in the U.K. These changes reflect the fact we can see consumer trends are evolving as is the regulatory environment. And in completing our evaluation and affecting these changes, we leave ourselves in great shape to remain focused on driving value for all of our stakeholders. From clients to partners, to employees and to our shareholders. With that, I'll now hand over to Craig to cover the financial impacts.

Thanks, Andrew, and good morning, everyone. I'm going to cover the financial impact of the changes that Andrew has outlined and the way that affect the cash results in the future before providing some guidance on how you might go about modeling them. Finally, and for illustrative purposes, I'll give an overview of what the revised pattern of the cash results might look like in the future. I'll also comment briefly on embedded value, IFRS and solvency and then the dividend. So turning to the cash result first. There are 4 key things coming from the changes we've announced that will impact on the results. These are the removal of initial product charges, the simplification of charges for bonds and pensions, the lowering of ongoing charges and the costs to implement the changes. Let's take a moment to illustrate how these changes will affect each of our 2 main product wrappers, starting with bonds and pensions. The chart shows our retained margin in each policy year with the current structure shown in blue comparing to the future structure shown in green, covering initial product charges first as this slide shows, and as Andrew has mentioned, new business written in the new charging structure will carry no initial product charges. This will have an immediate effect on the cash result from the point of implementation onwards, serving to eliminate the margin arising from new business. The second item is the simplification of charges on bonds and pensions, which means from the date of implementation, there will be no gestation period for new business meaning that new bond and pension business written from that point on will immediately start contributing to the cash results. The benefit will be small initially, but will increase more rapidly as new business accumulates in the new structure having a significant positive effect on the cash results in the medium to long term. As a reminder to those less familiar, gestation is a feature of our current charge structure where by new bonds and pension business does not earn annual management charges in the first 6 years after it's written, thereby creating a temporary drag on the cash result but good visibility over future growth and income as it matures beyond 6 years. As a point of interest, some GBP 47 billion of funds under management was in gestation at the half year, and this stock of funds will continue to mature over time. As we look ahead, therefore, we'll get the twin benefit of new business contributing from day 1, and we'll also get the benefit of existing FUM in gestation maturing over time. The third impact is that we're both reducing and harmonizing the ongoing product charges for mature bonds and pensions that are outside of their gestation period. These reductions in product charges are partially offset by a higher retention of ongoing advice charges, but the net benefit to clients will reduce the margin for net income from FUM. This revised margin will apply to gestation funds as they mature going forward. Now turning to our Unit Trusts and ISA wrapper. The changes to the charging structure are much simpler resulting in the removal of initial product charges and a reduction in ongoing product charges. The final impact arises from the one-off implementation costs of GBP 140 million to GBP 160 million that Andrew has already referenced. This implementation project will get underway immediately. And I expect costs in 2023 of some GBP 10 million followed by GBP 95 million in '24 and GBP 45 million in the first half of 2025. The majority of these costs relate to substantial systems and process changes needed in order to unbundle and forward account for existing investment products and, of course, to be able to run new investments made from the point of implementation onwards. These costs will be disclosed separately within the underlying cash result and will not be considered within our controllable overheads on the basis that they are one-off in nature. Taking a step back from the detail of these changes, we see that the first and third items will act as an immediate drag on the cash result from the point of implementation. But the second item will act to accelerate growth in the cash results as we gradually move away from the current gestation structure. Putting all of this together, the net effect is that the cash result will be lower in the short term as we transition to the new structure but is likely to be higher in the medium to long term as we begin to generate income from the outset across all of our product wrappers. I'll now provide some guidance on how you might model the ongoing impact of these changes. The simplification of our charging structure will not only a comparison, as Andrew has mentioned, but it'll also presents an opportunity to simplify our accounting in the future. For now though, I'll provide guidance based on our current format of reporting. Starting with the margin arising from new business, we would no longer expect this line to contribute to the cash result from the point of implementation because of the removal of initial product charges. Turning next to the income from funds under management, there are 2 key drivers that will influence this profile under the new structure. These are the overall margin and the mature fund balance against which the margin should be applied. The margin range for net income from mature funds under management will reduce going forward. And the range we're now guiding on from the point of implementation onwards is set out on this slide. However, as I've mentioned, you should also assume that 100% of gross inflows will contribute immediately to mature funds in the future. The effect of this is that our new margin range will apply to a quickly increasing proportion of funds under management as the gestation balance and existence at the point of change matures. Following this 6-year transition period, there will be no further concept of gestation FUM and the margin range will apply to all funds under management. Finally, you'll also need to allow for the one-off implementation costs using the phasing profile that I've already described. There are a number of key factors that drive the cash result that have to be subject to key assumptions. These include market performance and the impact of the operating environment on gross and net flows. The impact of what we've set out today, however, will result in a more straightforward financial model where cash emerges in line with the development of total funds under management. Getting to this point reduces the cash results in the short term but strengthens us in the medium to long term, given the absence of a gestation balance. Now there's always a challenge with forecast in the future, particularly given the assumptions I've just described. But I thought it might be helpful to show you how the combined income components of our cash results being the net income from funds under management and the margin arising from new business, might have progressed over the last 6 financial years, had we have put in place the structure back in 2016 and kept everything else as actually achieved. What you can see from this slide is the pattern I've described with the cash income impacted in the early period of transition but then recovering rapidly. Next let me mention embedded value. Now that we've made a decision to change our charges structure, we will perform a full reassessment of embedded value taking into account all of the changes. Our preliminary reassessment, however, is that embedded value per share now that the decision has been made is approximately GBP 13.60 per share. For those of you that model IFRS, income will be impacted by the net changes to ongoing charges. If you take the margin I guided on for net income from FUM and the cash results and gross it up for tax, it will give you the IFRS revised income. It's worth noting though that there will be no further deferral of initial product charges under IFRS, and so there will be a net positive as the current stock of deferred income amortizers. There's very little to say on solvency because the changes we've announced have very little impact either now or in our projections. It remains strong with the ratio that's consistent with the risks of the business. Finally, I'll comment on the dividend. The changes I've outlined and the guidance I've given will result in your model showing a different trajectory for underlying cash than the ones you currently have. Our approach of allocating 70% of the underlying cash result to dividends will remain unchanged, and you should use this to model expected outcomes. Having said that, the board is very much aware of the importance of dividends to shareholders, and we'll always take account of the circumstances and the operating environment to decide whether a higher payout ratio or other methods of return are appropriate. I hope that gives a good perspective of what all of this means for our financials. So let me now hand back to Andrew.

Thank you, Craig. I'd now like to spend a few minutes adding some color to the Q3 new business update. We also communicated to the market this morning. I'm pleased to announce another robust quarter for St. James's Place, with our advisers attracting GBP 3.7 billion of new client investments to the business. Retention has again remained strong at over 95%, supporting a further GBP 0.9 billion of net inflows and contributing to funds under management closed in a period at GBP 158.6 billion. The demand for trusted face-to-face financial advice remains as strong as ever, but client capacity and confidence to commit to long-term investments has been impacted in the near term by an environment characterized by high interest rates, stubbornly high inflation and short-term alternatives in the form of cash. Despite a continuation of the challenging operating environment that we saw in the first half of the year, we continue to generate significant levels of net inflows. Once again, demonstrating the ongoing resilience of our business model. Looking forward, we're beginning to see signs that inflation is moderating and that the current cycle of interest rate increases may be reaching a peak. Bringing optimism that this will ease the pressure on clients and will, in due course, increase the confidence to commit to long-term investment. Having taken you through our resilient new business performance and the changes that we're announcing today to simplify our charging structure, I wanted to take a moment to reiterate that there are no changes to our wider strategic priorities or dividend policy. We will, therefore, continue to measure ourselves against the targets that we set out in our 2025 business plan ambitions, recognizing that these are challenging in the current market environment. But it is very much business as usual, and we continue to focus on the same 6 business priorities to deliver for all of our stakeholders. 2023 to date has highlighted the importance of our robust business model as we have navigated challenging external conditions effectively and continued to grow our business. We continue to see an attractive market opportunity and the review that we have undertaken leaves us well placed to capitalize on this and lead the advice market into the future, delivering long-term resilient growth for our clients, partners and our shareholders. So that's it for our presentation. But before opening up for the live Q&A session, I just wanted to leave you with 3 key messages. First and foremost, clients will benefit from the changes we are making to charges as well as from a simpler and more comparable fee model. Second, there remains a huge opportunity for trusted face-to-face advice in the U.K. The changes we've announced only strengthen my conviction that SJP is well placed to capitalize on this opportunity by establishing a sustainable and compelling model for the future, supporting growth and enhancing our market leadership. Finally, we have an implementation plan and transition period to navigate, but these changes will present benefits for all of our stakeholders. That's it from us. Thank you for listening. And now over to the Q&A.

Hello. Good morning, everyone. Andrew Croft here. Thank you for joining us. Look, I appreciate there's a lot in the 2 announcements we made this morning. So I think probably to make the best use of your time, we can go straight into questions. So operator, back to you, please.

[Operator Instructions] We now have the first question from Charles Bendit of Redburn Atlantic.

I just had -- I had a couple of questions. One, wondering if you could give us some color on how much of the advice and fund charges you plan to retain in addition to the ongoing product charge. I think advice in the previous model was about 50 basis points? So just trying to reconcile that with the 80 basis points. Now, and then as a follow-up on that, just curious as to how you're thinking about low-cost passive products in the context of reducing the overall fee for clients and providing them with more choice. Is this now too difficult on the basis that 44 basis point net income margin assumes retention of some portion of the fund fee that would no longer be possible with a low-cost passive fund?

Thank you, Charles. I'll take the second one first and then perhaps pass over to Craig to do the first one. I actually think one of the benefits of doing what we're doing is it's going to give us great agility in the future. So I actually think it's easier in the future, Charles, to do something with passives than it would be today in the current structure. In terms of the first one, color on retention of fees. Now clearly, you've got -- you've got the advice fees, you've got the investment fees and you've got the platform fees. But at this stage, I probably -- best to hand over, over to Craig.

Yes. I'll probably give a double-barreled answer to this because what we've obviously presented here is something that's very different from our normal all-inclusive disclosures. But rather than just honing on one, it's worth we're just going through perhaps each of them. So we have the initial charge, which is now exclusively advice because we've removed the initial product fees. And the way to think about the future for that is that, that will behave in exactly the same way this initial advice fees have in the past and the amount retained within the business, which in the past will have gone away to support the margin on new business still goes to the same line, but the removal of the product fees mean that, that is now I would say, either it's negligible or 0. So what I suggested is that you assume that the margin arising on new business is a 0 figure. It could be fractionally above, fractionally below but for modeling purposes, assume now. For the ongoing advice, this is a change and whereas previously, the partnership retains all of the ongoing advice. We now, as within the business, retain 25 basis points and that supports the work that we do as an advice business. Product charges are corporate charges, so they stay within. And then the ongoing fund charge that we've shown has two elements to it. It has the work we do and the work we ask external managers to do. And I think if you think in terms of 17 basis points being retained. This is somewhere in that region. But the reason I say I will give a double barrel answer is that I am aware that this is a very different way of looking at SJP. I think it's a much clearer way. But the guidance that I've offered this morning is intended to make it as easy as possible for everyone to adapt their models at pace. So what I've done is I've taken a new approach to charging and spend of course, disclosure and kind of back sold that into the margin that you would have to apply to the mature funds under management in order to come up with the answer that we would come up with if we were using the same markets and new business assumptions that you're using in your models. So hopefully, that addresses the retention, but also the way we've described that in the onwards guidance.

We now have David McCann of Numis. Please go ahead.

Yes. Two strategic questions on this from me and two of more technical nature. So on the strategic questions, you've outlined all the client and the shareholder economics, elusively speaking work under the proposed change. What's the kind of adviser partner economics? How do they look and are they better or worse off than they are at the moment? That's the first one. Secondly, can you confirm, I guess, whether the regulators have given explicit blessing to these changes? Or are there any risks of any further changes to fees or the structure in some way going forward? That's the first two. And on the technical questions, in the past, you made the point that there are sort of costs embedded within both the new business and indeed the management fee margin. And with the product that is going to -- initial product fees going to 0 going forward. what happened to those stranded costs, if you like, that are currently contra to the revenue? Given there'll be no the revenue particularly for that line to do? Does that mean that the operating cost of the business go up in some way? And if so, what is that number? And then finally, the implementation cost you stated on a pretax basis? In conventional you normally state all of your numbers post tax. So is it just a case taking the 25% offset, i.e. is there a tax yield on this? Or if there's something else to take into account for tax purposes on those implementation costs?

Thank you, David. I'll take the two strategic ones and then probably -- probably I will pass over to Craig. On the regulatory one, David, I think as we all know, that's not quite how it works. The regulator doesn't bless and approve anything. But clearly, we are a big business in the U.K. And therefore, you can assume naturally assume it and that we would have involved engagement with our key regulators throughout this process. In terms of the second one, broadly speaking, the overall level of part of income, we would expect to be the same, but it will change shape. It's very difficult to talk about each individual partner because I think as you know, there's no such thing as an average inside the partnership to very, very broad church. And what we will be doing is working with our advisers helping transition through these changes.

Yes. So I think there were 2 questions there. So what I can say, there are no stranded costs in the model. And I think where your mind is going there is on the -- perhaps on the initial advice and some of the existing reporting on margin arising from new business. It's important to remember that there is a retention for the shareholder within the initial advice and that covers the costs, some of which are fixed, some of which are variable of getting that new business onto the books. So the cost that I think you're referring to aren't stranded they're covered by today's retention, which will also be tomorrow's retention. On implementation, you're quite right, I quoted a pretax figure. And I just felt in the context of full disclosure, it was important to quote the pretax figure rather than to net it all smaller on post tax. But absolutely, you should use the same tax assumptions that we've used elsewhere when you put that into your model, you should put it into the model on a net of tax basis.

We now have Enrico Bolzoni with JPMorgan.

So first question, can you give some extra color in terms of how we should think about these additional costs to implement these changes? What are they directed to? And related to that, is it possible that as a result of the investment in the business to transition to the new fee structure, you will have a more scalable business going forward and potentially lower cost growth? My second question relates to the existing targets. You briefly mentioned them in the press release, can you give us an idea of what do you expect in terms of gross flows? I mean you're going to have, if anything, an even more competitive pricing structure. So is it possible that if markets recover, you might exceed what was your original guidance? And then finally, I wanted to ask you if you can give some color on how you thought about balancing the interest of existing customers that clearly were onboarded on a different fee structure with respect to the new one. So how do you ensure that the existing clients that clearly benefited from the waiver, but arguably, they paid out your initial charges are satisfied with the fact that new customers actually will be onboarded on different terms and conditions.

Look, I think I will probably ask Craig to talk about the 2 cost questions. I think in respect of the gross growth in retail, I think what we're doing here is we're making our charging structure, more transparent. We're making it more comparable. We're making it simpler. So therefore, I would expect that we will have a broader clients offering going forward and therefore, be attractive to a larger market. In terms of specific points on gross flows, clearly, we've always got to reflect on the external environment. What we've seen this year is that clearly, there's cost of living crisis. People's capacity to invest has been impacted. But also there is the -- what has been the emergence of a cash alternative that we've not had for many, many years. So I think the actual gross flows will always be dependent upon those conditions. I think really importantly, that is sort of short-term stuff. I will always come back to -- in the long term, the dynamics of this business are very, very positive as they are for any advice business because, as you heard me say at the end of the video, the market is large, it's continuing to grow the need for advisers continuing to grow into generation transfer, not enough advice -- advisers out there. So long term, we remain incredibly confident. And by putting this new charging structure in place, we believe we will have a wider appeal to more customers. So hopefully, that does the flows. In terms of the costs, I think I'm passing over to Craig.

Yes. So if I go through August, as I said this morning, we've -- as we covered on the last question, there's a GBP 150 million assumed for the cost to change. This perhaps -- think about what's in that, the lion's share of that will be systems changes because whilst clearly, we've made every effort to try and simplify the presentation of what a simpler charging structure will look like when you get into the plumbing of a system that supports over 900,000 clients, it becomes very complicated because you're having to split each individual investments into the various component parts that will support all of the future accounting, future disclosure and future conversations. So we're having to make some significant changes to our 4 systems of record in order to achieve that. And that takes time and it takes investment. We've engaged with a third party to help us along the way on this to make sure that we're being realistic in terms of the time frame and the sort of time frame that we've announced this morning reflects both our view but also the input we have from other process. We haven't feel like the benefit of what you might regard as corporate muscle memory on this because we've been through a major systems implementation in moving all of our business onto Bluedoor. And for that reason, whilst this will present different new challenges, I'm sure we're working with the same parties, and we're in discussion with the same parties to get this additional piece of work done. So we feel as confident as we can be that we've assessed this in the right way, both in terms of scale and timing. It sort of moves on to what I think you're also asking, which is, is there an opportunity for us to look at the remainder of our cost base. And I think in time, I would hope it does. But again, we have to be realistic. This is a project that will deliver its final elements have changed. That will change along the path as well, I'm sure. But the change to the systems and the changes that we're discussing this morning will be in 2025. But then I suppose the final points I would make is that be realistic. We're very conscious that this is using a significant amount of resource in the business over the next 18 to 20 months. Work starts today. And we will be as keen as ever to be as realistic as we possibly can be on our ongoing controllable overheads and there is a question of striking that balance, we've got to make sure that we are realistic in setting budgets and forecasts. But we've also got to make sure we continue to invest in the business, and that means having the best people, retaining the best people and continuing to invest in future growth. So hopefully, I've paced up on everything that question stresses.

And I think your final question was on new and existing clients, and I think I understood the question. But I think let's just take a step back for a moment and how did we set the sort of fee for each of the components that are being separated in the future. Well, first and foremost, and actually, we were using consumer duty sort of lenses on it. First and foremost, looking at price versus value to the client. We also looked at the cost to deliver that service to clients. And then thirdly, we look at sort of comparable market rates. So we've got very comfortable and we've all got very comfortable with the individual components. Now those ongoing charges will apply to both the existing and new business at the point of implementation. And it builds on the fee cap that we've put in place at the very beginning of August, well existing clients who are currently in the -- in that gestation period in the early withdraw charges. They will remain in that early withdraw charge period until we've done -- the period naturally expires because at this point in time, there are no sort of product fees being applied there. So I think the other part of your question, I think, was something around initial advice. And I wasn't sure our products are there because new clients will continue to pay initial advice but as a center of service. Obviously, existing clients have already paid that. So that is factored in, but the ongoing charges for existing clients and good new clients will be the same subject to a little bit of variability around the portfolio that they're investing in because some funds will carry a higher or lower charges depending upon the nature of the investment. So I hope that I picked up that fourth question. Operator could we take next question?

We now have Andrew Crean of Bernstein Autonomous.

Can I have 3 questions, please? Firstly, what is the reduction in yield calculation versus the 2.3% that you used to present? Secondly, could you talk a little bit about your expectations for surrenders on life and pensions products now with the only withdrawal charges withdrawn? And then thirdly, I just wanted to look at what you were saying in July, where I think you said that we've looked every part of our business through the consumer duty lens and where change is needed to be made, we have made them, but that doesn't really square with the fact that you've announced these charges, all these changes to charges now and then even back in July, it was on the review.

Yes, Andy, let me take the final one first, and I'll probably also talk about the -- your question around expectations on surrenders before asking Craig to talk about the reduction in yield. And I think what we said early at the half year, and we were quite clear is the consumer duty. We have completed the consumer duty project. But that work actually sort of triggered an opportunity to continue to evaluate the business and enhance the long-term sustainable value for clients, and that's exactly what we've done. So consumer duty was done, and that triggered this review, looking at ensuring we had a sustainable and competitive charging platform for the long term. And that's the point about simplicity, a point about our comparative -- comparability, but also very importantly, a continued focus on value of clients. So hopefully -- I answered that one. In terms of the -- sorry.

To be clear -- so just to be clear on that, you're saying there was a 2-stage process. There was a reaction or reaction to consumer duty and then that left post July to a second body of work, which is what you're reporting now?

Yes. In effect, and I just wonder that it's worthwhile actually reading out what was said just to help the -- have answer the question. So now that consumer duty is coming into effect, we are treating the completion. I emphasize the word completion of the specific work that was required as an opportunity to continue to evaluate our business and enhance long-term sustainable value for clients, the partnership, shareholders and all other stakeholders. Consumer duty done. And then in terms of the early withdrawal charge, I wouldn't really expect to see any significant change whenever we So -- obviously, we're very comfortable with the early withdrawal charge mechanism. It's difficult to compare, and it can be difficult to explain. But if you look at outflows on the early withdrawal charge mechanism, there isn't a significant little difference between that and ISAs and Unit Trust, particularly at the end of the 6-year period. So we don't see a huge spike as people are taking redemptions at the end of the early withdrawal charge bit. So personally, I wouldn't expect there to be any [indiscernible]. And then in terms of the reduction in yield, if I can perhaps pass that over to Craig.

Yes. And I think there were 2 ways of looking at that. The -- if you imagine the -- in the case of Unit Trust and ISAs, we tend to look at a 10-year reduction in yield, and that's what we asked external organizations to challenge us with in terms of where we sit compared to others that can provide full range of services we provide. The changes to Unit Trust and ISAs is far more straightforward. And I think the reduction in ongoing charges and the removal of initial charges will tell you that if you imagine that graph we've used in the past showing where we sit amongst spares of our competitors. We don't know yet where we sit because that work will need to be revised. But I think if you have that in front of you, you can probably expect that we'll be moving to the left, and that's probably the sort of direction in terms of consumer client value, you want to be going in. For bonds and pensions, it's clearly a more complicated picture because of the way in which the charging structures currently work where you have a period where there is no ongoing charge followed by the period with a slightly higher charge, and then you take into account the change that we announced at December. That all becomes much clearer under the new structure. And although I haven't got all the data in front of me, I think if you take all of the decisions we've made, including the one that we announced in July, you will see that any bond and pension investors going -- even it'll need to be giving new investors in the new charging structure will be better off after about 17 or 18 years. And it's worth having in mind that these are generally very long-term investors.

We will now move on to the next questioner. We now have Ashik Musaddi.

Good Morning Andy, Good Morning Craig, just a couple of questions I have is, first of all, just to be clear, all these changes that we are talking about will only happen in second half 2025 and not before that? And if it is not happening before that, then how do we think about customers, I mean new flows for next 1.5 to 2 years because why would a lot of customers come in and lock in their business for 6 years, locking their AUM for 6 years, how will the advisers react ahead of that change? So any color on that? Have you thought about it? Have you discussed this with any advisers, et cetera? Some color on that would be very helpful. And secondly is on dividend. Now given that this one-off cost is now part of the underlying cash, I mean, it would mean that dividend will go up and then down and go up and then down. So is this okay with you to have that much volatility on dividend? Or would you say that, okay, because you still have MSB, et cetera, you will try to maintain the current dividend level and then move to a payout ratio of 70% once it reaches that 70% level. But for next 2, 3 years, you would be okay to pay a higher dividend. I guess you mentioned that you -- this would be discussed with the Board at a later stage. But any additional color on that would be great, just because this extra cost is now added into underlying costs?

Thank you, Ashik. Look, I'll take the flow question and then pass the dividend over to Craig. And look, let's just take a step back for a moment as well. There are clearly a lot of changes, which we've announced that will be completed sort of middle -- middle or second half of 2025. But this is really important. We remain very comfortable with the current charges and the current structures. This is all about looking forward to do what we have that sustainable competitive model as the requirements of consumers, the requirements of regulators change to make things more comparable and more simple. This is very much a future looking change. If we think come to come and sort of answer your specific question, it's worst, again, taking that step back, we are an advice business. So clients are receiving a holistic advice, and they will be using their tax allowances as part of that advice. So for instance, if you have an IHT liability, you're not going to wait until second half of 2025. You will continue to do their advice. And remember, charges will going down for existing clients to this as well when it's implemented. And so our business is more about the advice than it is timing. So not expecting to see any real impact there. And I said that we were comfortable with our existing structures, and we're confident that we offer value now. The changes will enhance that value that we're offering. So hopefully, that answers your question.

I'll pick up the dividend question. The changes we've outlined and the guidance that you've seen in the slide deck once you put those into the models, I think you're right, the underlying cash result will show a different trajectory. So the one that you might have heard before the announcement this morning. The approach of allocating 70% is unchanged, remain unchanged. And the points I made this morning is that you should use that to model expected outcomes but I can only really repeat what I said in the presentation, and that is the Board is acutely aware of the importance of dividends to shareholders. And we're always taking accounts of the circumstances the operating environment prevailing at the points at which any decision is made synthesized whether a higher payout ratio is appropriate. What I'm not in a position to do now though is some call what I think the outlook and the operating environment will be when those decisions are made. You commented on a couple of years there. And I think why there will be an implementation cost in '24 that you'll include in your models. And then the tail of that implementation cost and the transition will be in '25 and '26 before you see that accelerated recovery in '27 onwards, that should be the sort of shape you're seeing in your revised model.

We now have as Nasib Ahmed of UBS.