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Head to head: Should the FSA extend its platform ban to life wrappers?

Danny Wynn, Director of platforms and policy, Legal and General
Danny Wynn, Director of platforms and policy, Legal & General

First, platforms and life wrappers are historically different. It is entirely inaccurate to consider an insured life and pension product as a wrapper in the same way as an Isa or general investment account on a platform.

An Isa account is a true wrapper because the client is buying a product that cannot pay a rebate. With a life and pension wrapper, there is an actual defined product that is constructed by the provider.

In this instance, the client never buys an underlying asset, they have a policy contract with us and we buy the assets. Also, these assets are not available elsewhere in the market because they are insured funds constructed by the provider. This means that any comparison between platforms and “wrappers” is inaccurate in the first place.

If the regulator did ban rebates on life wrappers, there would be a minefield of unintended consequences

This sounds very technical but it has far-reaching outcomes. When providers create these funds, they also invest them in other funds. If the FSA did ban rebates on life wrappers, they would also be looking at banning rebates in the multi-manager mar-ket, and the discretionary fund manager space. There would be a minefield of unintended consequences.

As regards the argument of banning rebates on life wrappers to make life easier for IFAs when comparing products, this is only looking at half the market through one lens.

Platforms and products can both be destinations for client assets. However, at the end of the day the role of an adviser is to pick the vehicle that delivers the right solution for the client. This is often defined by the tax treatment of the assets. For example, if the right tax treatment for a client is the tax treatment you get with an Isa, it will clearly not compete with a bond.

David Ferguson, Chief executive, Nucleus
David Ferguson, Chief executive, Nucleus

I see the competition as being between our bond or pension and someone else’s bond or pension. It should never be between an Isa or a general investment account and a bond because that means we are not competing on bases that are in the client’s best interest.

Continuing to allow life wrappers to pay rebates does not mean it will be harder for IFAs to compare client solutions. Stopping products cross-subsidising other services in the value chain through the banning of commission will make product comparison easier, interfering in how products themselves are structured will not.

From the moment the FSA released its paper informing us that rebates would be banned for wrap clients but not life companies and fund supermarkets, I have been very confused and slightly concerned. Confused as to why the rules were not the same across the board and concerned that the already uneven playing field would be pushed even further off kilter.

My main worry is that the market will be pushed further towards the opaque structure that we have been campaigning so hard for years to get away from. I have been very vocal in my belief that the industry needs much greater transparency something that is arguably lacking at present.

It is this sort of behaviour and opaqueness that has resulted in the industry eroding the confidence of consumers. There is a significant amount of positive change that is required if the industry is to stand any chance of building the kind of trust it needs to. In my opinion, much of that trust will be founded on the kind of transparency that will give consumers confidence the current situation of dirty margins and kickbacks is well and truly a thing of the past.

While the FSA has made no comment on whether or not these rules will be changed, I fully agree with Martin when he says the regulator will inevitably extend the ban to life wrappers. I have every confidence that it will realise that in the run-up to the RDR, in an age of transparency and fairness, having one rule for one and a different rule for the other is simply not acceptable.


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. so what if you are trying to compare a bond administered on a warp facility that is completely transparent with a life company bond which isn’t ?

  2. I’m confused! Mind you when a provider of life Wraps such as bonds comes out kicking to defend the rebate, it does get me wondering just how much the provider gets as a result. I would guess a substantial amount. I really would like to know.

  3. …’a minefield of unintended consequences’ doesn’t sound very technical to me….

  4. For a life product, the client owns a contract with the life company which says that the benefits of the contract are defined by the performance of a particular asset. The client doesn’t own the asset, only the contract.

    Are you with me so far?

    The life company then has a liability which will fluctuate according to the performance of that external asst – so in order to protect itself, it buys roughly the right amount of the external fund. This immunises it. The life company buys the asset, not the client; the life company decides how much to buy – it may not buy the exact amount that reflects what the client has bought (for example, it will usually operate with a minimum deal size). So the link between the client and the external fund is a notional one only.

    Rebates from fund managers don’t pass to clients – they belong to the life company. There may be a trail on the product, but this is completely independent of the notional fund choice – remember, the client doesn’t own the fund, he owns the contract.

    All clear?

  5. I am not clear how Jim Roberts or Danny Wynn’s logic distinguishes between the assets in a bond on a Platform or a Pension wrapper on a Platform and the same asset in a bond in a life compnay or a pension in a life company. None of their examples makes the distinction in convincing terms. And David Ferguson must surely be right too when he makes the DFM point. Why would any client object to the investment manager obtaining discounts for them? If obtaining a 1/2 AMC is good for the DFM why is it bad on an IFA using a Platform? Having the other 1/2 of the AMC paid in to the client’s account in cash is ideal for all concerned surely? It means that a Platform class of units does not need to be created and run at great expense and it means that teh rebates are easily tracked, and that they do not interfere with CGT calculations.
    We need transparency here. This decade’s theme so far. Transparency is not served by the creation of barriers to it: barriers to obtaining clear, appreciable benefits to clients in the form of unbundled reduced charging. There is every reason to back Nucleus in the battle for it.

  6. yet more evidence of the ignorance and incompetence of central planning bureaucrats as their silly rules create ever more chaos in the spontaneous order of the free market. This is just one of what will be literally thousands of ‘unintended consequences’. Bonkers, the Failed FSA, uttelry bonkers.

  7. Jim is absolutley spot on – for a life product there is no rebate.
    At least that is the usual situation as the life company holds the assets inside a life fund. In some cases it may chose as an asset a collective fund (in house or somebody elses) in which case the fund manager could provide a rebate or more likley a discounted management charge.
    Do the fund supermarkets think that discounts should be banned? in which case I’m off to stock up on boxes of ale before the nutters take over.

  8. Andy seems to be missing the point that if Platforms disclose unbundled charging then life compnaies should surely need to do exactly the same. Danny Wynn makes points in his article which attempt to put life companies and Platforms somehow in a different space. None of the points he makes delivers a distinction however. He begins by telling us that the difference is ‘historic’. Hardly an up to date incisive point. Can anybody tell me why there should be one rule for insurers and another for Platforms?

  9. Sadly those in the OEIC world do not understand life company world and often visa versa.

    Jim Roberts is spot on.

  10. With life products It is hard to see what the ‘AMC ‘ is. This is why life co’s were forced to use indicative net charges (INET) on fund performance data, many products will have a zero AMC but of course other charges.

    I think it would help if Life co’s had to disclose what the actual AMC ie the true cost of just running the life fund was.

    Life companies cannot be banned from negotiating a discount on external fund management fees on funds owned by said life company. It’s about disclosure not banning.

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