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Rebate debate

Critics of the FSA’s proposed ban of cash rebates are hoping for a U-turn, says Sam Macdonald

The FSA’s proposal to ban cash rebates in November’s consultation paper has been heavily criticised by platform providers.

The FSA climbed down from its original proposal to ban rebates between fund managers and platforms and instead called for “improved disclosure” of the payments to clients.

But it proposed that providers cannot offer a cash rebate from their product charges to consumers if it would offset, or appear to offset, an adviser charge.

As the proposal only prevents cash rebates, fund managers will still be allowed to rebate part of their fund charges to customers in the form of additional units.

Many respondents fear that if the ban is enforced it will reduce transparency between clients and advisers.

The FSA’s proposals stem from its belief that advisers are opting for products with large rebates to mask an adviser charge – a claim many in the industry deny.
The vast majority of platforms have criticised the ban.

Transact head of sales and marketing Malcolm Murray says the proposal may have unintended consequences. “It is obviously part of the FSA’s desire to drive costs down but we think this could actually push client costs up. A lot of cash rebates are pretty small so it is likely fund managers will add charges on top.”

Tisa director of policy Malcolm Small warns that a ban on cash rebates could deal an unintentional blow to the reregistration. He says: “Ending the rebating of an element of a fund manager’s annual management charge in cash and restricting this to units or shares is disproportionate.

“It will create operational difficulties and may well have the unintended consequence of derailing the platform registration programme.”

Ascentric managing director Hugo Thorman agrees. He says: “We have explained to the FSA that we do not believe there is a need to ban cash rebates. It would not achieve the FSA’s desired outcome.” Thorman was involved in bringing together a group of UK platform providers, including Ascentric, Nucleus, Novia, Transact, Fidelity FundsNetwork, Standard Life, Axa, Aviva, Raymond James and 7IM, to submit a joint response to the consultation, in addition to their own individual responses.

Skandia and Cofunds declined to contribute to the submission. Cofunds says it agrees with the group’s stance on rebates but felt its individual submission, along with its contribution to the UK Platform Group’s submission, was sufficient.

Skandia proposition marketing manager Jeremy Mugridge says: “We had a difference of opinion over cash rebates. We feel we can accommodate the requirements.”
Skandia agrees with the FSA’s ban on cash rebates, saying it will make it possible to distinguish between rebate payments and adviser charges.

In its response to the paper, Skandia says: “We have sympathy with the FSA’s view that customers may perceive cash rebates as an offset to adviser charges. The ban will ensure there is a clear separation of rebate payments and adviser charges.

“We disagree with those who contend that passing on rebates to customers in the form of units is unworkable and that a ban on cash rebates would result in adverse customer outcomes.”

Other FSA proposals such as compulsory re-registration and greater clarity of charges have gained the full support of providers.

Aviva Wrap marketing manager Phil Ralli thinks the FSA’s plan to make charges clearer to consumers would be effective. He says: “Aviva supports the FSA proposals on adviser charging and regards effective and flexible adviser charging as vital for platforms.”

Threesixty director Phil Young says the paper could go further to make it easier to compare charges on unbundled and bundled platforms by enforcing a standard charging procedure and breakdown.

He says: “Compulsory offers of re-registration is something we whole-heartedly support and we think it is right in the interests of fairness and choice to the client. The differences between bundled and unbundled platforms, however, mean it is virtually impossible to compare the charges from one platform to another. It is important to look at this and it would be cheap for the FSA to address.”

Avalon director Harry Kerr feels the FSA does not understand what platform providers do. He describes the regulator’s definition of a platform – as providing administration services to fund managers, – as “bizarre”.

He adds: “The regulator does not understand we are product providers in our own right.”

Now the responses have been submitted there is a cautious optimism from most of the platform providers that the FSA may change its mind and decide against banning cash rebates. However, some fear the regulator could still go against the wishes of the industry.

Ascentric head of marketing Dom Ventham says the volume of opposition to the rebate proposal should make the FSA realise it does not have the support of the platform industry.

He says: “We are hopeful the FSA will listen to us. I meet with fund managers on a daily basis and I have not found one person in support of it. If the fund managers are lobbying against it, the advisers are lobbying against it and the providers are lobbying against it, then who ultimately will be the ones to support it?”

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