One of the lesser but recurring characters in The Simpsons, my favourite animated TV show, is Helen Lovejoy. Wife of Reverend Timothy Lovejoy, Helen has the catchphrase (often used in times of civic crisis), “Will someone please think of the children?”.
We have our own civic crisis in the retail financial services sector right now. Will someone please think of the clients?
Platforms were blindsided by the timing of the HMRC decision to tax fund rebates. Most had accepted rebates were doomed, but wanted to believe they had at least another year to get their collective acts together on the issue.
When you are keeping your eye on the regulator, it’s the taxman that poses the biggest risk to your business model.
I believe that taxing fund rebates is inherently unfair. How HMRC reached the illogical conclusion that a return of charges paid by an investor constitutes income is beyond rational understanding of the tax system.
It raises the possibility that HMRC will also tax retailer loyalty cards and other cashback schemes. Annual tax bill with your Nectar card statement, anyone?
But the mere fact that rebates are a return of investor charges is at the heart of a wider issue about fairness and transparency. Will someone please think of the clients?
When we announced the charging structure on our new platform for self-directed investors recently, I was shocked at some of the comments from investors who have been used to existing platforms which operate on the basis of rebates and loyalty bonuses.
Perhaps I should not have been surprised, but there is a genuine belief out there that investors are getting platform services for ‘free’.
When you bundle up charges, it is inevitable there will be confusion. Bundled charges are intended to create confusion so margins can be protected.
Fund rebates can work where they are properly explained; where the investor clearly understands they are paying for three components (fund, platform and advice) within their single annual management charge. This robust disclosure is most likely to happen in the advised environment.
Where investors believe they get platform services and/or advice for ‘free’ because of the rebates, the situation is close to them being misled by omission.
Used in this way, rebates and loyalty bonuses are little more than taking with one hand and giving back with another.
Clean funds are the future. Their eventual success was guaranteed by the FCA position on banning cash and unit rebates, for both advised and non-advised platforms. This inevitable success was accelerated by the HMRC decision to tax rebates.
Retail financial services being what it is, nothing can ever be as simple as one set of clean share class funds introduced along with transparent platform and advice charges. Of course it can’t.
Instead, those with massive vested interests feel the need to complexify the situation, negotiating ‘superclean’ funds with fund providers.
This has been defended in the name of delivering lower charges to investors as a benefit of large platform buying power. If that is the eventual outcome, that’s a good thing.
It will be a very bad thing if it creates barriers to re-registration, difficulty making like-for-like comparisons and keeps fund management charges artificially higher than necessary by virtue of reduced downward pressure on prices.
What many of us fear and suspect is that it is a way of protecting platform margins. It’s a failure to recognise that buying power in the modern world of retail financial services vests not with the providers but with the clients.
Will someone please think of the clients as we make the (now rapid) transition to clean funds and transparent pricing? If the history of financial services tells us anything, their priorities are likely to slip lower down the list.
Martin Bamford is managing director of Informed Choice