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Under the bonnet: The new ‘transparent’ world of platform rebates

In a bid to improve charges transparency, and alongside the changes brought in under the RDR, the regulator has moved to radically alter the system of rebates paid between fund managers, platforms, advisers and clients.

After a series of yo-yo-ing decisions on the best course of action, the FSA ultimately settled on a plan to ban payments between fund managers and platforms, and ban cash rebates.

The ban on payments to platforms applies to new and legacy business, with platforms given a two-year sunset clause until April 2016 to comply with the legacy business ban.

The ban on cash rebates only applies to new business.

For new business, the rules came into force on 6 April, heralding in a new, supposedly transparent world of post-RDR platform pricing.

But an investigation by Money Marketing into 14 UK platforms shows that the new world is anything but transparent.

From the way rebates are paid to clients, to the amount of interest paid, to how long clients have to wait to receive rebates owed to them, it seems there is still a long way to go before the regulator can claim to have unwound the myriad systems in place.

Unit rebates

Where platforms have made the decision to continue offering rebate-paying funds, the fund manager rebate must be passed in full to the client.

The trouble is most fund houses pay those rebates in cash, meaning the receiving platform has to find an alternative way to deliver the payment to clients.

Investment consultancy Gbi2 managing director Graham Bentley says the logical approach is to deliver rebates back in units of the fund which issued the rebate.

He says: “If you have set up a portfolio with a specific risk profile, you want the units in the same funds so the proportions remain the same.”

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James Hay, AJ Bell, Nucleus and Skandia all adopt this approach. Aviva, while it no longer offers rebate-paying funds, has opted to switch all legacy funds to pay a unit rebate in the same fund, removing cash rebates.

Fidelity, Cofunds and Hargreaves Lansdown all pay the rebate back in units of the client’s largest clean holding – potentially raising problems where clients do not have a clean fund.

In what has been seen as something of a controversial move, Transact pays back rebates in units of money market funds or gilt funds on both new business and on legacy business, effectively replicating the traditional cash rebate model.

In its client literature, Transact explains: “Imagine a client holds units in a fund in both her general investment account and pension that the rebate from that fund comes to £13; and that £12.99 of the rebate is due in her pension and one penny is due in her GIA.

“In these circumstances, the whole rebate must be used to buy units. None of it can be retained as cash. And so one penny must be used to buy units in the GIA.

“When that fraction of a unit is purchased it will add another transaction to be taken into account when calculating capital gains.”

The Lang Cat senior consultant Sam Lynn says: “Given the underlying policy reason for banning cash rebates was that they could effectively be used as a substitute for commission, it will be interesting to see if the FCA do eventually take a closer look at the arrangements Transact has put in place.”

Timing and frequency

Delivering rebates in this “near-cash” format means Transact can pay rebates to clients as and when they are received by fund groups.

Most other platforms offering rebate-paying share classes pay rebates monthly, matching when fund groups pay out in most cases.

At Cofunds, Aviva, James Hay, Skandia, Nucleus and  Hargreaves Lansdown fund managers are invoiced monthly and rebates are paid subject to a maximum 10-day delay.

Axa Elevate also invoices on a monthly basis. It avoids the 10-day delay by “pre-funding” the rebate, that is, paying it to clients in advance of recouping rebates from fund houses in bulk at a later date.

Pre-funding is also available on Fidelity FundsNetwork, although the platform only credits accounts on a quarterly basis. 

Clients with AJ Bell face the longest wait to receive rebates owed to them, at six months.

The platform is planning to bulk-convert clients to clean share classes later this year. Until then, rebates which are normally paid monthly, quarterly or half-yearly by fund managers, will be batched up and paid twice a year.

Leaving the platform and selling down funds

As part of its push for platform transparency, the regulator has sought to make re-registration, or switching between platforms, easier.  

But what happens to rebates due if the client has left the platform or sold the fund into which the rebate would have been paid?

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With FundsNetwork and Cofunds, rebates are paid into the largest clean fund. In the event a client buys a rebate-paying fund and sells it before receiving the rebate, the platform says it would pay the rebate to a cash unit trust if possible. It admits the rebate would not transfer if the client had only legacy funds or had left the platform.

James Hay clients that leave the platform can receive rebates owed, but have to pay up to £50 to access payments such as rebates or dividends when they leave.

Hargreaves, Transact, AJ Bell, Nucleus and Skandia all say any outstanding rebates can be paid back to the client if they leave.

If a client has sold out of a rebate-paying fund, James Hay, Aviva, Nucleus and AJ Bell revert to a cash rebate while Skandia allocates payments to the largest fund.

Interest

Platforms vary widely on the rates they offer on cash held by clients on the platform.

AJ Bell, Cofunds and Skandia say they do not hold rebates in interest paying accounts ahead of rebates being converted into units.

Transact, Nucleus, Hargreaves and Aviva all say they pass on the full interest earned to clients.

James Hay is the only platform to retain interest on rebates before they are paid back to clients.

Unbundled platforms

Some platforms, including Standard Life, Novia and Alliance Trust Savings have decided to avoid the issues associated with paying back rebates altogether. Instead they have chosen to bulk-convert clients to clean share classes.

Other platforms say they would consider bulk switching but are worried about the implications of draft guidance from the FCA in October which warn against the risk of client detriment when bulk switching.

The difficulty comes in that a handful of fund groups have not made equivalent clean share classes available for existing funds, while some clean funds have launched with a higher annual management charge than the bundled fund.

Lynn says: “This is a live operational issue for the industry right now, so firms really could do with seeing the final FCA guidance as soon as possible, especially if there are going to be any material changes from the earlier consultation.”

To tackle the problem of avoiding client detriment, Standard Life and Novia are prompting clients to move funds where costs are more expensive within the clean funds.

 Alliance Trust Savings waives dealing costs for clients wishing to switch funds where there is no clean alternative or it is more expensive.

Aegon will continue to pass through cash rebates on legacy business but no longer supports any rebates on new business.

ADVISER VIEW: PAUL RICHARDSON

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As you have shown, there is no clear process about what to do with rebates and it seems like some platforms are forgetting who the money belongs to. We would prefer a move over to clean as it gives clarity to the consumer. We need a clear charge for the investment, the wrapper and the advice.

ADVISER VIEW: GUY OVENDEN

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It is nigh on impossible for the man in the street to understand this. The platforms had enough time from the regulator and they should have agreed an industry-wide standard for rebates. The rebate should be paid into the same fund it came from.

  

PLATFORMS’ STANCE ON REBATES – AT A GLANCE

Transact

All rebates paid instantly in units of money market funds or gilt funds

James Hay

Rebates paid monthly in units of same fund, paid cash where fund has been sold. Platform receives interest before paying back rebates, and requires clients to pay to access rebates when the leave

Nucleus

Rebates paid monthly in units of same fund, or cash where the fund has been sold. 

Hargreaves Lansdown

Rebates paid monthly in units or largest holding. Interest partially retained by platform. 

Skandia

Rebates paid monthly in units of same fund or largest fund if sold. 

Cofunds

Rebates paid monthly in units of largest clean holding. 

Aviva

All rebates paid monthly in units of the same fund or cash where fund has been sold.

AJ Bell

Rebates paid every six months in units of the same fund or cash where fund sold. 

Axa Elevate

Rebates paid monthly, pre-funded with the platform settling with fund groups at a later date. 

Fidelity FundsNetwork

Units paid quarterly, pre-funded in units of largest clean holding. Clients will not receive rebates after closing platform account.

PLATFORMS’ CASH ISA PLANS

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Platforms are working to expand cash options within Isa wrappers in the wake of the Budget. 

Chancellor George Osborne’s radical budget last month included plans for the New Isa – an increase to the Isa allowance to £15,000 from July, all of which can be held in cash, stocks and shares or a mixture of the two. 

Cofunds, AJ Bell, Aviva, Nucleus, Axa and Ascentric all say they will be able to offer the full £15,000 allowance in cash from July.

Skandia annouced plans earlier this month to introduce a cash Isa following the Budget. 

Ascentric marketing director Mike Morrow says: “We are expecting Nisas to be good for platform Isas generally as the rates available historically on pure cash Isas are low and look to continue to be low in the medium term, whereas this change makes it attractive to look at some of the “near cash” type funds that could give a better rate without loss of liquidity.”

AJ Bell says it will look to make a wider range of cash options available subject to demand. 

Cofunds head of marketing Stephen Wynn-Jones says: “We currently have a short-term cash haven on the platform. It is too early to speak about specific details but the Budget may be an opportunity to extend cash investments.”

EXPERT VIEW: HOLLY MACKAY

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This highlights the utterly confusing world which consumers, indeed all platform users, have been ushered into.  

Some of this confusion should be transitory as we move to a clean share class world.

Gradually we will see fewer rebates as the old taps are slowly turned off and more players will adopt preferential share classes.

As this happens, we would like to see the dialogue move away from
administration complexities and move towards improved understanding of total cost of ownership for the client. 

Undoubtedly, larger platforms will have a competitive advantage here. 

The inconsistent treatment of rebates, of share class naming and labelling, of rebate payment timeframes, of selldown procedures if minimum cash levels are not met and so on.

This all illustrates the very uneven playing fields we have today.

The difference between a platform which pre-funds rebates quarterly and one which pays them every six months is one of those little details in isolation which can
become much more important if particular platforms are consistently weak or strong on these areas.

Whilst the ultimate goal of improved clarity for consumers feels  tangible over the next three to five years, we have some very real short-term issues which are being worked through as operations teams, compliance teams and commercial teams try to sync their agendas and customer propositions.

Holly Mackay is managing director at The Platforum

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Comments

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

  1. The FSA/FCA thinking on cash rebates to clients on platform held funds has always been muddled and the reason for banning them somewhat shallow when there are still so many many other pricing practices which are rather more obviously ‘bad’ and really do deserve to be banned. This article also skips over the whole background during which the FCA resisted the idea that cash rebates could be reinvested in funds other than the source of the rebate until very late 2013. The legal position is and always has been that only the client can direct where funds are to be invested. In the case of rebates that client ‘instruction’ is given to the platform via the platform terms and conditions. The late acceptance of this by the FCA means that many platforms had already completed expensive and complicated rebate reinvestment processes and now probably wish they had done something much simpler, like Transact.

  2. William Watling 17th April 2014 at 4:37 pm

    Holly, don’t forget the Capita Illustrator tool produces a single solution cost with all the rebates, etc taken in to account when it calcs the single RIY. It’s easy to do the comparisons once the platforms have updated their charges, rebates, etc

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