Ban on cash rebates to fund platforms

Fund managers will be banned from rebating their charges to the online platforms that promote their funds – and platforms will no longer be able to keep the payments they receive secret – under new proposals from the Financial Services Authority (FSA).

On Monday, the regulator published rules governing the sale of funds via fund platforms, such as those operated by Cofunds, Hargreaves Lansdown and Fidelity FundsNetwork. This move followed a consultation process to address concerns over undisclosed payments from fund managers to platform operators.

Earlier this year, the Financial Services Consumer Panel (FSCP) warned that the way platforms are currently paid is potentially “detrimental” to investors – as they do not know how much a platform is paid to sell different funds, and may only be offered funds that give rebates to platforms.

Now, the FSA has decided that “it would be desirable, in principle, to ban both cash rebates from product providers to investors, and product provider payments to platforms.”

In addition, the regulator announced a new rule that will “require platforms to disclose to professional and retail clients any fees or commission they arrange to accept from third parties in relation to retail investment products… These should be disclosed in advance of the platform providing services to those clients.”

Other measures outlined included a requirement that financial advisers only “use platforms services that present their retail investment products without bias”, as well as steps to ensure that investors using platforms receive all fund information, and have their funds transferred more quickly.

According to the FSA, the aim is to ensure that private investors receive a better service, and platforms become more transparent and efficient. “The rules published today are designed to enable consumers to understand... what they are paying for,” said Sheila Nicoll, FSA director of conduct policy. “We also believe that it is likely to be in the best interests of consumers that product providers’ payments to platforms, and cash rebates from product providers to investors, should be banned.”

However, the rebate ban will not be introduced until 2013 at the earliest, to allow the FSA to carry out an assessment of “the impact on consumers and on firms’ business models” – a delay that has drawn criticism from some financial services firms.

Fidelity International – one of the UK’s largest fund managers, and operator of its own fund platform – described the FSA’s announcement as “not good for consumers, not good for advisers and not good for the industry.”

Gary Shaughnessy, its UK managing director, said: “Today’s outcome will simply lead to yet more debate, more consultation and even more cost. Incomplete proposals, different rules for different products and different distribution channels are likely to lead to confusion for consumers.”

Eversheds, a law firm that advises financial services companies, expressed similar frustrations. “The culmination of five years of consultation is: more consultation,” said partner Michael Wainwright. “The issue of payments by product providers to platforms is one of the most important issues in the FSA’s Retail Distribution Review project, but the final rules as they currently stand are no more than a statement of intent.”

Even the FSCP said it was “disappointed that no firm date for implementation has been set.”

But FSCP chair Adam Philips welcomed the FSA’s decision in principle to ban rebates to platforms. “Rebates can create bias in favour of more costly products and a potential mechanism for advisers to receive commission,” he said. ”Banning them is the right move.”

Platform operators still oppose a ban, though. AJ Bell, which operates a fund platform for pension investors, urged the FSA to defer any decision on rebates and payments to platforms until the end of 2014. Andy Bell, chief executive of AJ Bell said: “Despite the FSA stating its preferred outcome is the banning of both cash rebates and provider payments to platforms, I believe that, in practice, the responsibility placed on advisers under the Retail Distribution Review and market forces will be sufficient to persuade the Regulator in due course that its current concerns are unfounded.”

A ban would effectively end the practice of ‘bundling’ charges together – whereby investors appear to pay just one charge, but do not know how it is split between the fund manager and the platform provider. This lack of disclosure has led some to accuse platforms of promoting fund managers who rebate the most generous ‘cut’.

“Traditionally, the cheaper platforms, or ‘fund supermarkets’, have operated a ‘bundled’ charging model, where the customer pays one flat management fee to the product provider, who then rebates part of this fee to platforms and advisers to pay their charges,” pointed out Tim Boyce, partner in law firm Osborne Clarke’s financial services regulatory practice. “The FSA has shown that it is committed to ending this situation, which can lead to confusion from the customer as to what exactly they are paying for their adviser or platform. This is also intended to increase fairness to consumers since, traditionally, there has been a potential for bias against products which pay little or no rebate to the platform provider.”

Adviser Stuart Fowler, of wealth management firm Fowler Drew, argued that only a total ban would stamp this bias out. “Some agents may get round commission bans and create business formats that are just as biased as currently,” he said. “The FSA is therefore right to stick to its guns that nothing that looks like commission can be paid to either a platform or an end investor.”

Managers of investment trusts – which have been excluded from some platforms because they do not pay rebates or commissions – said the disclosure of separate charges would ultimately benefit investors.

“The best long-term and sustainable model for consumers and advisers is one where there is an explicit charge for advice, an explicit charge for the funds and an explicit charge for the platform, all agreed and paid for by the client,” argued Ian Sayers, director-general of the Association of Investment Companies. “Only this model can create the kind of transparency required to prevent inappropriate incentives.”

He called on the FSA to implement a ban on rebates and bundled charges as soon as possible. “Delaying the decision to ban such payments for a long time… risks inappropriate practices becoming embedded which will be harder to unwind at a later stage,” he said. “We urge the FSA to commit to a timetable to moving to this model as soon as possible after the Retail Distribution Review [in 2013].”