Two days into the FSA’s latest consultation period around fund manager rebates and mass hysteria seems to be the order of the day. At one end of the debate, Skandia is telling everyone that it was right all along and at the other end, more modern, transparent wraps are bemoaning the proposal to ban cash rebates.
While I naturally sit firmly in the latter camp I think much of the discussion since Wednesday overlooks the deeper strategic issues, most of which we gained clarity on last year.
The biggest regulatory-driven change occurring in the platform sector today is that fund supermarkets are about to lose 75 per cent of their revenue line.
That’s a pretty big number and one which throws the future of that sector into question. It seems pretty clear that the response will be to seek to replace this cashflow with a direct customer charge but that may not be as straightforward as it first seems.
After all, some clients probably believe that these platforms are (close to) free and very few advisers will have a full appreciation of the fund manager distribution deals that at least partly these legacy models.
This is the crux of the matter and where attention should be focused. The Deloitte paper which accompanied the FSA’s document posed some pretty probing questions regarding fund supermarket business models and so it looks like some of these old platforms may be confronting a dramatic change to their operating model from a position of structural weakness. Good luck to them.
On the wrap side it is possible that the unit rebate issue will go away long before December 2013 if the trend towards clean share classes continues. Should some groups persist with ’loaded’ share classes the various wraps in the market will just need to find a way to deal with unit rebates or more accurately, cash rebates to be reinvested in units. This feels more complex than cash rebates and there will an increase in trading activity as clients on balance will have less liquidity in their accounts but it certainly isn’t rocket science. Nor is it as challenging as having to replace 75 per cent of a company’s revenue.
It also seems that the FSA has recognised at least some of the operational issues and has hinted that there may not be a requirement to reinvest into a fund which the client has sold out of.
There’s some detail behind that and they may want to go further, perhaps even to say there is no need to reinvest if the buy instruction is likely to result in a sell again a few days/weeks later to meet portfolio liquidity requirements. Failing that it seems obvious that clients sitting on platforms with trading charges are going to get hammered, which seems unlikely to have been the regulator’s intention.
All in all it seems entirely obvious that the more open and transparent wrap model shall prevail. From where I sit I see no wraps working on plans to launch a fund supermarket. All good then and aside from cash rebates the only thing we’d really have liked to have seen would have been an extension of these rules across to packaged life and pensions products. Maybe the FSA has simply concluded that this sector is in terminal decline and therefore just not worth the effort?
David Ferguson is chief executive of Nucleus