UPDATE 1-Hargreaves Lansdown grows in UK retail finance shakeup

LONDON Fri Oct 12, 2012 10:56am BST

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LONDON Oct 12 (Reuters) - Britain's regulatory shakeup of how financial products are sold to small investors is boosting the market dominance of investment manager Hargreaves Lansdown , which has seen assets grow to all-time highs in a soft market.

Revenues in the three months to the end of September, traditionally the quietest season of the year, were up by a fifth from a year earlier at 68.7 million pounds ($110.2 million), a record for any quarter, the company said.

Assets under administration increased 2.2 billion pounds to 28.5 billion pounds.

Under new rules to come into effect next year, a traditional model of selling financial products for a commission is being scrapped and replaced with a fee-based system, playing to Hargreaves Lansdown's strengths of providing broad access to the fund management market.

Regulators argue these reforms will better ensure financial advisers sell the most appropriate products for their clients' needs as the old system encouraged them to promote investments that offered the juiciest commissions.

The new regime also imposes more rigorous compliance procedures on practitioners, driving up costs and making many smaller financial advisory businesses uneconomic.

And the requirement to charge fees rather than commission will mean financial advisers will either need to be offering products on a huge scale - like Hargreaves Lansdown - or specialise in richer, higher value clients.

"You need to be large and you need to have a decent brand name," Chief Executive Ian Gorham told Reuters.

The next quarter is likely to be stronger still, benefiting from clients prompted to invest by new fund launches and Hargreaves Lansdown's role in giving individual investors access to insurer Direct Line's initial public offer.

"The thing that makes people act is good offers and something new," Gorham said.

Investors cheered the numbers, driving the company's shares up 2.5 percent by mid morning.

"Hargreaves Lansdown continues to gain market share and with the prospect of IFA (independent financial adviser) cost disclosure from the start of next year, we expect Hargreaves Lansdown to win a significant number of former IFA customers," Numis analysts said in a note to clients.

But the trading statement also revealed some of Hargreaves Lansdown's clients are feeling the pinch in hard economic times.

Net new business was 19 percent down on the previous year at 550 million pounds. The firm attributed some of this drop to clients eating into their capital, cashing in investments such as individual savings accounts (ISA) - a tax free investment scheme - to cover living expenses.

"We have seen more part withdrawals from things like ISAs. If it's part withdrawal you know it's not losing the business to a competitor because they would take the whole ISA. What's happening is people are eating into capital because they are stretched," Gorham said.