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Matter of principles

The retail distribution review promises to take up a lot of column inches between now and whenever it comes to an end.

With responses not due in until the end of the year, a feedback state-ment expected in the second quarter of 2008 and a possible further consultation paper due after that, it is going to be a long haul.

As part of its review of the distribution landscape, the FSA has rightly turned its attention to the role of platforms.

Over the last year or so, as platforms have become increasingly popular with advisers, it is important to ensure that they are appropriately regulated and offer adequate levels of investor protection.

As a starting point, and given the dynamic nature of the market, the Investment Management Association supports a principles-based approach to the regulation of platforms as this can be easily adapted to market developments without the need for frequent rule changes.

The IMA believes that the focus of regulation of platforms should be on the transparency of the platform arrangements.

This should allow investors and their advisers to make well-informed decisions about the services they are using and the charges which will apply to those services.

The IMA also believes that the type of service provided by the platform and how charges are taken should determine the level of regulation required so it is important that regulation seeks to look beyond the label and instead focuses on the characteristics of services provided. If a platform is purely administrative, allowing users to access, manage and value all investments in one place via open architecture, then there is less regulation required than other types of platforms or wrap account services as the latter may have different features such as a limited fund choice or wrappers which carry costs.

Such features may also lead to more opaque charging structures or decisions which are not in the best interests of the investor.

The aim should be for investors to be fully aware of all charges across all products or product combinations at the same time as being mindful of investors’ ability to understand information if there is too much of it or if it if overly complicated. To this end, disclosure of the total expense ratio, any initial charges and the fund’s performance would be the best way of allowing investors and advisers to compare investment funds with other types of investment as well as comparing the cost of buying funds direct with buying them through a platform or wrapped in another product.

Using a platform should not make it harder for investors to understand the charges being applied for different services and it may even be that there is a need for greater disclosure by platform providers at the point of sale.

It is disappointing that with this consul-tation, the FSA did not take the oppor-tunity to review the packaged product rules, which have become outdated and redundant, particularly in light of EU developments, notably the markets in financial instruments directive.

Removal of these rules and concentration on principles-based regulation would help to focus on the service element of platforms.

Mona Patel is head of communications at the Investment Management Association

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