I am struggling to reconcile the FSA focus on consumer outcomes as the primary objective for the retail distribution review with the latest consultation from Canary Wharf on the role of platforms.
There is some consensus that platforms have been facilitating and probably even leading the move to the new world of empowered consumers, transparency and professional advice that is paid for by consumers not providers.
Platforms believed the FSA understood this and was minded to direct the industry in the same direction. That was until CP10/29 and the recent operational questionnaire.
Something seems to have happened over 2010 that led the FSA to believe the most important objective of the RDR is to ban cash rebates paid to customers.
Why the change of heart? The reason given for the banning of cash rebates has been the temptation for, and one assumes actual evidence of, advisers offsetting the rebate against their own charge for advice or arranging.
The problem is that the consultation that appears to have taken place before CP10/29 did not include the very platforms charged with making this work.
An adviser made a recent comment on a blog that he agreed with a rebate ban because the rebate was messy to report and explain. He also said there should be only one institutional share class.
This is the perfect solution where only one share class fits with a fund manager’s strategy. The problem is that many fund managers, often for historical reasons, will have a multi-channel strategy and will not be able to provide their funds at a single lowest price.
In a market economy they, like any other product or service provider, have the right to price differentially. But differential pricing in a world without rebates means a share class for each price level. Add to this the necessity to retain commissions for legacy business and we have three share classes. You could add more for any platform that negotiates a special deal.
The FSA’s other big mission is a world of cheap and unrestricted re-registration from one nominee to another. But this can not be reconciled with a world of multiple share classes.
If the adviser’s chosen platform offers a fund with an annual management charge of 75 basis points, what is to be done with the units transferred that are a different class and with a different AMC?
The answer is to switch them at the same time but this will require further work for the adviser. Add to this the difficulty and wasted time in explaining different share classes to customers and correcting inevitable errors when the wrong share class is bought or transferred. Multiple share classes and auto-registration can not be delivered without cost and confusion.
The regulator’s other radical suggestion is to credit the rebate in units.
This has really tested the bounds of comprehension and credulity for some platform leaders. As yet, platform providers, with one notable exception, have failed to identify a method of delivering this without a substantially detrimental impact on the customer through both cost and confusing presentation.
What does a platform do with rebates that arrive after a client has sold their holding? On a £10,000 holding this would be around £2.083 worth of units each month. And how does a platform present the potential gains/losses in a holding where each monthly credit of units will be at a different price?
Multiply these two issues by the number of funds in a client portfolio and imagine that as the platform or adviser you have to explain what you are doing for the client and why.
Equally frustrating is the casual inconsistency of the argument. If cash rebates will tempt advisers to offset their charge against the rebate, how come a unit rebate will not result in the same behaviour? The change from cash to units simply changes the currency of the alleged offset.
One objective for the FSA seems to be to increase competition. Point 6.17 of CP 10/29 states: “By allowing discounts to be passed on to consumers in the form of additional units we are also providing an additional channel for future price competition to develop in the longer term, with the potential of a lower level of prices resulting from the competitive process.”
But if this is the aim, surely cash rebates would achieve competition more effectively.
We are left with the primary objective that is to avoid the possibility of advisers offsetting rebates against their own charges. But customers invest about £6bn net each year in this way without noticeable evidence of this happening. If it does, how will a ban on cash rebates stop it? Customers still know how much they pay for what.
The regulator has indicated it will be disappointed if retail fund prices do not fall to reflect the loss of commission. The consultation paper says: “We would be surprised, given the impact on a fund manager’s performance figures, if fund AMCs were maintained at the current levels. We would also be disappointed, given the confusion for consumers this would cause.
We expect that AMCs would be reduced to reflect the fact that the client will now be paying the adviser separately, and any discounts negotiated would be starting from the reduced AMCs.”
This seems reasonable. Could it be then that this is an implicit and perhaps indirect objective of the ban on rebates, to ensure retail fund prices do not stay at the current level, that is, priced to accommodate a margin for commission or distribution?
I realise this is conjecture but would it be likely to work?
The rebate in units means current retail prices can be retained. The current retail prices will also be demanded by direct platforms. Not only will a cash rebate ban be detrimental to the client and the principles of the RDR, it will also fail to influence retail fund prices.
There must be a better way to apply pressure to ensure the price level of the standard share class drops from 1.5 per cent to 1 per cent.
One also has to question the benefit of any attempt to influence list prices. Surely it is the net price paid by the consumer that is important. Who cares what the list price of a book is these days? It is the net price you pay on Amazon that counts.
If you wanted to apply pressure to the net price, would you try to ban the discount? Would banning the discount actually result in the consumer paying more and not less?
Even more important than all of the above is the fact it is now only 21 months until RDR becomes reality.
The FSA remains unclear what the detailed rules should be for legacy asset commissions and rebates. We all need to know when commissions on existing business can be retained and what would bring about the end of that arrangement. We then need to apply these complex rules to our businesses.
This will not be a trivial or low-cost exercise and it must be resolved before the RDR can possibly take place. The regulator should focus on resolving that issue and cease the pursuit of a cash rebate ban that will be detrimental to consumers and have more widespread consequences that are still not fully understood by the industry and the FSA.