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Skandia: Cash rebate ban a victory for the consumer

Skandia chief exec Peter Mann praises the FSA’s cash rebate ban. To read more commentary see related stories (right).

For sometime now I have campaigned strongly, and in isolation, that cash rebates are not in the customer’s best interest. Customers invest via platforms to accumulate units in funds, they do not use platforms to hold cash. Over time, unit rebates will have a compound effect on growth, making them far more advantageous than cash.

The problem with cash rebates, which the FSA consumer research supports, is that customers do not view the cash accounts as being theirs, but rather a ‘mechanism from which their adviser could be paid’.

From a customer perspective cash rebates could create confusion around exactly how much they are paying for both the platform and advice. This is because the platform charge and advice costs can be automatically deducted from their cash account which is funded by cash rebates rather than the investor. Even when fully disclosed, there remains a real possibility that investors could think their platform and advice costs are paid for by the rebates they receive. This is much closer to the current commission regime than it is to the new adviser charging regime.

So where do wrap providers go now?

The decision by the FSA is blow to wrap providers, and will no doubt have a detrimental impact. It will be a complete change to their business model to move away from cash rebates into unit rebates, but in my opinion it is something they must do in order to stay competitive.

Many fund groups have confirmed that a platform rebate will still be available post RDR and even fund groups who have announced 75bps share classes post RDR could still negotiate with platforms to offer some level of rebate. The main platforms will continue to use their scale to ensure the best possible net price from fund groups for the benefit of their customers.  

Wraps also face challenges around the future of their cash accounts. If these accounts are no longer being funded by cash rebates, one could argue what their purpose is. There are other ways to manage cash for a customer, rather than using a platform cash account. Indeed in some scenarios it is more advantageous to take adviser charges out of the product wrapper rather than use a central cash account. For example, in a pension, it could be more cost effective to take charges from within the pension wrapper to benefit from tax relief.

It is also great news that non-advised platforms are included, as this will help create a level playing field. In the new RDR world, all charges should be completely transparent, and it is important that advised and non advised routes are treated equally to prevent bias.

Peter Mann is chief executive of Skandia UK

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Skandia – it they were as good at product development as they are at schadenfreunde it would be a great company.

    Also – try reading the NMG report quoted by the FSA and you will realise that “customers do not view the cash accounts as being theirs” is not what NMG actually say and is a mistaken interpretation

  2. David Scrivens 29th June 2012 at 2:25 pm

    I use a platform personally and I like many others view the cash shown in the account in the same way as the cash shown in my bank statement.

  3. It is clear that Peter has a fundamental misunuderstanding of the whole cash rebate subject or, he is delighted that Skandia have had their own way and do not have to change their technology. In an open and transparent world advisers should be able to agree the level of initial and annual fees with their clients, the fact that these come from cash rebates or from the clients bank account makes no difference apart from making it far more complicated and a far less convenient situation for the client. Opiton 1, net share classes – this means there will be no injection of cash into the clients portfolio and therefore the client will have to write a cheque every six months to a year (perhaps more frequently) to fund the platform and the adviser charges or these could be paid from the clients’ income from the portfolio, again not a great situation for the adviser to explain. Option 2, unit rebates, (ridiculous in my mind but…) – units are rebated and these need to be sold to fund charges, potential charge to sell the units and potential CGT implications, therefore loosing money that clients righly deserve for being invested via a transparent!!!!! wrap platform for which they pay an explicit agreed fee! Or maybe wraps and platforms should go down the Skandia route and not disclose how much rebate they receive back from fund managers and keep a healthy chunk of it. Skandia’s business model will not survive in a completely transparent world and we all know that. Cash accounts on wraps are completely transaparent and act in exactly the same way a bank account would, simples!

  4. Much as I liked what Skandia did in 1998 when I first staretd using them, for me, it is them that have lost their way compared to their competition.
    The more I read on the issue, the more I agree with Stanley Kirk and anon above, that this is an illogic mistake on the part of the FSA.
    I would suggest they got back during the next few months and have a rethink while they still can.

  5. Larry in London 29th June 2012 at 3:01 pm

    We have a massively decreasing savings ratio in the UK and the FSA has everyone dancing on the head of a pin about charges — Cash rebates vs. unit rebates — IT DOES NOT MATTER A JOT. The only thing that matters is getting people investing (or saving, if that’s what they prefer).

    No matter how great the product, it still has to be advertised and sold. The Labour government thought that by making Stakeholder pensions cheap and efficient people would be breaking down the doors to get at them. But what happened? Nothing. The result is that Britain’s pension provision is now so dreadful and the projected burden on the state so massively larger than it was before politicians began meddling in commerce that it has become a text book example of the results of government interference in commerce.

    And now it’s happening to other retail investments. By taking profitability out of distributing investment products, the only thing the FSA will have achieved is REDUCED DISTRIBUTION. People will not flock to buy a new improved product because there will be nobody with any incentive to tell them about it.

    What a waste of everyone’s time to fix something that wasn’t broken.

    The FSA’s fastidiousness in redesigning the UK’s retail investment landscape is matched only by their lack of understanding of the effect of their misguided efforts.

    Love

    Larry

  6. I’m glad the regulator is banning rebates, as surely a provider of a service should provide the customer with a clear charging structure that makes sense and is fair to all customers.
    If a fund manager charges 1.5% why do they then discount this price down to 0.9% by way of a 0.6% rebate. Why not just simply charge 0.9%, much easier to explain and much easier to understand.
    There is no such thing as a free lunch and I suspect some platforms have been keeping these charges to themselves rather rebating back to the client.
    If fund managers want to attract business than they will have to increase performance and if necessary decrease charges.
    If platforms want to attract business than they need to up their game on customer service and also provide competitively priced service.
    I suspect larger adviser firms will be able to push down the costs of the services over a period of time just like Tesco’s and other supermarkets do to their supply chain. After all the adviser is the customer facing part of our service and should also be the one pushing prices down and also pushing the better customer service.
    The other major cost within our industry is the advice service and surely that means that the majority of the fees should be paid to the adviser – as I never see the product providers been charged exorbitant FSCS fees when things go wrong – it’s the advisers that pick up the bill.

  7. The major victory for consumers is the ban on backhanders (rebates) to platform operators like Skandia. As this is the majority of their income at the moment – Skandia will face significant challenge to bring in client charging, which is what the Wraps have been doing for years. The degree of difficulty is confirmed by the ‘smokescreen’ statements from the CEO like the one above.

  8. I fear that the tweaks on fund rebates is only the tip of the iceberg that is the unhappy parent company looking at a loss-making subsidiary rapidly entering a world of margin compressions!

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