After a further weekend’s delay, the FSA has finally unveiled PS11/9, which comes 16 months after DP10/2 and eight months after CP10/29. Despite the lack of absolute clarity in some areas, what has emerged today is a step forward for transparency and should forever banish the notion of platforms as distributors.
Where CP10/29 rather backtracked on DP10/2’s robust stance around banning rebates and seemed to breath new life into the fund supermarket model, today’s assertion that the “proposed rule COBS 6.1E.1R requires the platform service provider to clearly disclose the fee/commission it arranges to accept from third parties such as fund managers” is extremely welcome.
The direction of travel is clear – the use of rebates to influence client outcomes is considered inappropriate, whether that influence is exercised at a platform or an adviser level and the days of opaque bundled platforms are numbered. Whether or not you buy the line that adviser behaviour is influence by rebates (I don’t) the direction of travel favours greater transparency and as such is to be welcomed.
In a post-RDR world it is the adviser’s responsibility to assemble whatever supply chain components make up the client proposition in a manner consistent with the objectives, ethics and values of the IFA firm. It is difficult to see how a platform that considers itself a distributor (today’s paper confirms that many do) and is therefore infused with bias can sensibly form part of that supply chain as any changes to that platform’s commercial arrangements may pollute the client outcome. After all, what if a fund group favoured by the adviser refuses to pay the shelf space fee or seeks to reduce the rebate payable to the platform and the platform removes access to that group’s funds?
On this supply chain theme the regulator has wisely clarified that no single platform can ever meet the requirements of all clients. This view is particularly strongly held in respect of fund supermarkets or those wraps that retain on a hybrid basis, retaining part of the rebate for ‘distribution’ and those platforms operating on an open basis, unconstrained by payments from fund managers will particularly welcome the FSA’s assertion that “an independent firm faces significant challenges in complying with COBS 6.2A.4AR and COBS 6.2A.4BG if they exclusively or extensively use a platform that only features products which pay the platform a rebate”.
The FSA further states that it is not seeking an outcome in which advisers create an artificial spread of investments to meet the independence rule. Indeed the regulator points out the potential inefficiency for IFA firms in using more than one platform. It looks like advisers who responsibly use one wrap platform for significant segments of their (perhaps broadly homogenous) clients will be able to continue as today. Those stretching that to all clients or seeking to deliver such a model on a constrained platform may be forced into greater change.
Overall, the challenge for fund managers, product providers and platforms is to recognise the magnitude of the RDR shift and particularly that the days of commission and kickback-driven operations are numbered. Although we are yet to see where the detail takes us to on fund manager rebates, the FSA appears to have tilted the market in favour of transparent, genuinely open businesses that are set up to deliver better client outcomes. That can only be good news.
David Ferguson is chief executive of Nucleus