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Transact: Cash rebate ban would create huge consumer detriment

ian_taylor.jpg

Transact says the debate about whether cash rebates to clients are equivalent to adviser commission is a “dangerous semantic distraction” from the problems that would be caused by a cash rebate ban.

Transact managing director Ian Taylor (pictured) says the potential cost to investors of a cash rebate ban is “immense” because clients who hold assets through a wrap service will be disadvantaged to the value of the rebate they would have received.

Taylor says: “The issue that a rebate to a client is equivalent to a commission payment to an adviser is the wrong debate and a dangerous semantic distraction from the real issue.

“Banning cash rebates would cause extensive client detriment and lead to very many investors paying more than they need to. The potential cost to investors of a rebate ban is immense.”

The FSA’s platform policy statement, published in August, delayed the final decision on whether to ban cash rebates being paid by platforms to clients but said it is “desirable” to do so, along with banning payments between product providers and platforms.

Once decided, the new rules will not come into force until after the RDR deadline of January 1, 2013.

Ascentric managing director Hugo Thorman says: “I agree that there will be client detriment if there is a ban on rebates to clients.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Giles Robinette 1st June 2012 at 12:21 pm

    This is where the new “clean” share classes come in. Instead of e.g. the investor paying an AMC of 150bp to the fund, the fund paying rebate of 75bp to the platform, the platform paying 50bp back to the investor, keeping 25 bp for itself, the investor switches to the clean share class with an AMC of 75bp and pays a platform fee of 25bp, ending up where they started. The problem in the short term is that although many fund groups already have clean share classes in place, few platforms have propositions in place yet to accommodate this as their model is based on receiving rebates from the funds (some of which they may pass on to the investor) rather than charging the investor. This will be a tricky transition as the investor is not used to paying platform fees.

  2. Actually, Giles, my argument is precisely the opposite. Clean share classes do NOT solve all problems.

    Transact clients have been used to paying the platform for over a decade and Transact does not retain any of the rebate. So, no problem with either of those things.

    Instead the problem is caused by the fact that most clients already own 150bps shares and want to re-register those onto platforms. They don’t want to sell these to buy the new class (tax, spread implications &c) and the asset management/TPA industry is not set up to do (tax neutral) share class conversions between valuation points every day. Even if a conversion takes only a week and is done free of charge, the client is still paying more AMC than they need to for that week.

    My point about the way the cash rebate process works is that it ain’t broke so don’t fix it.

    If you’d like a copy of the paper which contains this argument in full, just drop me an email or give me a call.

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