FSA to ban platform rebates – update

27th June 2012

The Financial Services Authority claims that the proposed ban on all kick-backs from product providers to platforms is designed to make charges clearer to investors, and make it easier to compare the costs of investing through different platforms.

Platforms provide a convenient one-stop shop, allowing investors to buy funds from different providers and hold them in the same place, with a single statement for their whole portfolio. Popular platforms include Cofunds, which only accepts business via financial advisers, Vantage from investment product and services provider Hargreaves Lansdown and Fidelity Funds Network.

The ban on rebates will cover not just advised platforms, but also execution only, direct-to-consumer platforms, with final rules to be implemented by 2014.

Why change the current kick-backs?

At present, investment managers generally pay to have their products included on a platform, and this cost is passed on to investors in the price of the product.

The FSA said the way in which consumers currently pay for platform services "hinders transparency" and "has the potential to negatively affect competition in the market", according to reports on today's consultation paper by IFA online.

Sheila Nicoll, director of conduct policy at the FSA, said: "At the moment many investors have no idea what they are paying for this service, while some believe it is free.

"This needs to change. Today we are proposing changes that give investors and their advisers more control and mean that they know exactly what they are paying for a platform's service."

If you want a sense of how initial charges and commission currently stack up for different platforms, advisers and brokers, check out the calculator constructed by subscription-based platform provider rplan.

How will it affect the platform providers?

Major platforms providers denied that the changes would shatter their existing business models.

Cofunds had already announced new transparent pricing, and praised the FSA proposals, saying: "Rebates mask the real cost of the process and the decision to ban them is an essential step towards enabling people to accurately assess the value of the service they're receiving."

Last year, Hargreaves Lansdown's share price took a hit when the FSA first broached the idea of extending its ban on fund manager rebates to execution-only platforms. Today Hargreaves Lansdown declared that "the FSA's position does not come as surprise, and our planning has been focused on a ‘no payments to platforms' outcome.

"We firmly believe our business model is flexible enough to deal with any changes we may need to make when the FSA finalise their rules."

Fidelity also asserted that it "welcomed increased transparency" and that "business models are already transitioning in line with many of these proposals".

Not all platforms are reliant on hidden commission charges. rplan for example, a more recent entrant founded 18 months ago, charges a monthly subscription instead.

Discussing the rebate ban, Andy Creak, director and co-founder, said: "We believe investors will work out where their money goes and the change in their behaviour will be significantly more than any regulation change.

Greater choice and clarity for investors

Sweeping away rebates to platforms may enable investors to access a wider range of funds, including those from asset managers that previously paid little or nothing to platforms.

Investment trusts, which do not pay commission to financial advisers, have historically had a lower profile than unit trusts or open-ended investment companies (Oeics).

Unsurprisingly, the Association of Investment Companies (AIC), which represents investment trusts, supports the FSA plans.

Ian Sayers, director general at the AIC, said: "This model will encourage platforms to hold the broadest range of investment products, including investment companies which have not paid for access in the past.

"It will also ensure platforms are better able to help independent advisers fulfil their own obligations to review the whole of market when helping their clients build a portfolio."

Investors may also find it easier to identify better-performing funds, according to coverage by What Investment.

Andrew Power, lead partner for the impending Retail Distribution Review (RDR) at Deloitte, was quoted as saying:  "Asset managers who have been reliant on rebates to obtain shelf space on platforms will need to ensure their propositions still stand up in a cash rebate free market."

Rplan's Creak echoed the view that scrapping rebates could influence the products sold, as platforms would no longer have a commission-driven incentive to push one fund over another.

Broadening the ban across the retail market

The regulator also confirmed a ban on cash rebates of product charges for all advised sales, not just products sold through platforms. This ban will only apply to new business once the rules are implemented, and not to products purchased beforehand.

In addition, the FSA is considering widening the ban across the whole market, picking up self-invested personal pension (SIPP) operators and life companies.

 

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