The FSA’s proposed ban on fund manager and platform rebates for advised businesses has sparked concerns of an unlevel playing field if execution-only platforms are allowed to maintain the status quo.
In its March RDR platform paper, Platforms: delivering the RDR and other issues for discussion, the FSA outlines several options on rebates, including an outright ban on rebates, full disclosure to the client and stricter rules or guidance on unacceptable practices.
The regulator says it favours a ban but stresses this is not a final decision and says it does not see a need for these rules to apply to executiononly platforms such as Hargreaves Lansdown’s Vantage platform.
Ascentric and Standard Life are urging the FSA to include direct to consumer execution-only platforms in its final rules, warning of the risk of potential fund bias, particularly for firms with buying power.
Ascentric managing director Hugo Thorman says: “The opportunity for direct to consumer platforms to influence selection of funds which may reflect a higher level of rebates that are not disclosed to the consumer is potentially higher than on advised platforms. The clients ought to be able to see what rebates there are.”
Standard Life head of platform sales Steven Sands says: “There should not be differentiation. If the rules do not apply to execution-only, you could see the potential for IFAs to expand their execution-only arms and for fund groups to offer big rebates to them.”
Chelsea Financial Services managing director and the Association of Independent Discount Brokers chairman Darius McDermott rejects this argument but admits that execution-only platforms need to offer transparent disclosure of charges.
He says: “If we go down the route of a total ban on fund groups paying platforms anything, there is significant evidence to suggest the cost to the end client will go up. Why should that happen in the non-advised world when RDR has come about because of failings in the advisory community?”
’We have got to find some commonality. The FSA seems very short on that and quick to add extra regulation’
Financial Discounts Direct managing director Paul Penny agrees that direct customer charging would increase costs but says clearer disclosure of distribution and admin charges may help by allowing all parties to see commercial arrangements negotiated between fund groups and platforms.
He says: “The regulator could say you have to set a fixed administration fee that you are going to charge to the fund groups and it can be whatever they like as it is a commercial arrangement. Then if the fund group wants to pay additional funds to the platform for distribution, fine, but it has to be done separately and disclosed. That way, everyone knows. If what you are seeking is transparency, you can see who is paying what and who has a vested interest. It just makes it clear.
“That said, if the plat-form has got things on it which are on there because the fund provider has paid more to the platforms, it does not really matter as long as the cost to the client is the same.”
Willis Owen director Alan Easter disagrees with the ban on bundled pric-ing in both the advisory and execution-only space. He says the debate should not be about whether to bundle or unbundle charges but how to reconcile a fund’s total expense ratio with its annual management charge.
He says: “The biggest challenge has got to be the difference between AMC and TERs. Funds that are promoting themselves as 150 basis point funds when it is actually 220bps makes a massive difference. Bundling or unbundling a price in order to give a little bit of transparency does not.”
Highclere Financial Services partner Alan Lakey agrees there should be more clarity on AMC/TERs and says the FSA’s rules must offer a joined-up approach to rebates.
He says: “We have got to find some commonality. The FSA seems to be very short on that and quick to add extra regulation. I am certainly not in favour of what they have come up with. We do not want one rule for a bank, one rule for an IFA, one rule for direct to consumer and one rule for an advice. That does not make any sense.”
Bestinvest business manager Hugo Shaw also acknowledges the risk of having two ways of handling the charges.
He says: “It is confusing for a client that has part of a portfolio on an execution-only direct basis and perhaps wants to move to advice. If we are looking at the true spirit of RDR, then it should be open, transparent and apply to all.”
But Easter says the amount of client crossover between the two models is not sufficient enough to justify bringing non-advised business into the fold of the review.
He says: “All of those who offer unbundled platforms think that’s the only way forward and those with bundled platforms think that’s the only way because it’s going to cost them millions to change their business model. Why can we not have more than one style of running a platform?”