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Investment analysis: Last attempt to change FSA rebate stance

FSA Letters 480

Despite an apparent unswerving FSA commitment to ban cash rebates, the platform industry remains hopeful the FSA will change its mind in the interests of fairness to consumers and the industry alike.

In its June consultation paper the regulator confirmed its intention to push ahead with a ban on fund manager and cash rebates for both advised and execution-only platforms. Responses are now in as the industry took its final chance to change the FSA’s mind on the cash rebate ban.

The cash rebate ban has met with opposition from much of the platform industry. Many advisers say the current system works in the consumer’s interests without causing detriment or bias and warn any ban would add complexity.

Transact managing director Ian Taylor says the worrying consequences of a rebate ban have still to be recognised by the FSA, specifically around re-registered units and which are eligible for legacy commission and which are not.

In the Transact response to the consultation paper he says: “The reason legacy rebates cannot work is because assets cannot readily be tagged as being entitled to them. This problem we call “hidden states”. There is nothing in the name or class or International Securities Identification Number of the unit that identifies whether it is entitled to a legacy cash rebate or not as units enter and leave the records of clients, fund managers, platforms, registrars and all other parties involved in transactions and re-registration.”

Taylor hopes the FSA will change its mind on proposals when it fully realises the practical problems created by the ban.

“The FSA has never explained the problems it has with cash rebates and there has never been a practical solution put forward. I am still convinced that common sense will prevail,” he says.

The Tax Incentivised Savings Association is against the cash rebate ban. However, it says if the ban takes place there should be a minimum unit rebate level to eliminate the amount of transactions.

It says: “We recommend that the rules permit a de minimis allocation of units of £10 which would eliminate around 90 per cent of the 12.5 million unit rebate calculations that would take place in the event of a rebate ban.”

Tisa says the remaining client monies would be paid back because “over time platforms will find reporting and administering unit rebates to be overly burdensome and demand that fund managers provide simplified classes.”

Aifa policy director Chris Hannant says the ban works against the interests of clients. He says: “We are disappointed with the decision to remove cash rebates. An adviser charge paid from a cash account is convenient and often a consumer’s preferred method of payment. The current system works well for all parties, including consumers, and we are unconvinced that charges are ‘hidden’ by cash rebates.”

AJ Bell chief executive Andy Bell says: “In my view, had the author of the paper been predisposed towards cash rebates, there would have been more than sufficient research material to make the case for their retention.”

Ascentric also warns of the potential for consumer detriment. The platform’s response to the consultation says: “We do not agree with the ban and believe the move to unit rebates will result in operational complexity leading to higher charges, client confusion and tax consequences. Selling unites to pay for charges increases administration and will create the potential for chargeable gains to the client’s detriment.”

Ascentric marketing director Dominic Ventham adds: “I think the fact the FSA has put out another consultation shows it is willing to continue to listen to the industry on this.”

But Threesixty Services managing director Phil Young says if the FSA was to change its stance on a rebate ban it would have done so by now.

“A large part of the adviser and platform industries have been very hostile towards proposals for a long time. I think if the FSA was going to take this on board and U-turn on this it would have done so by now.”

The only supporter of the FSA’s cash rebate ban has been Skandia. It responded in favour of the FSA’s proposal in February last year with the majority of other platforms submitting a joint response to the FSA calling for a rethink.

A Skandia spokesman says: “We are supportive of the proposals and we applaud the FSA’s policy decisions. We believe cash rebates are good for customers because they will enable competitive forces to work in favour of the customer.”

The changes are set to be introduced on December 31 with final rules laid out before the end of this year. The cash rebate ban will only apply to new business from December 31, 2013 and not to retail products bought before that date.

The regulator is set to produce final rules before the end of the year, giving platforms around 12 months to make the required changes.

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