FSA, investment platforms & cash rebates
The Financial Services Authority (FSA) has published a Policy Statement looking at the use of investment platforms, often referred to as ‘wraps’, in the context of the Retail Distribution Review (RDR).
PS11/09 follows an earlier Consultation Paper and Discussion Paper on the same subject. As a Policy Statement, it contains details of the final rules which will be added to the FSA Handbook in due course.
Perhaps the most contentious issues during this process have been the proposal to ban payments by product providers to platforms and cash rebates made to investors.
As a firm, we support the ban on product provider payments to platforms. We believe that the proposal to ban cash rebates to investors is misguided.
It is interesting to note that around three-quarters of those who responded to the FSA proposal to ban cash rebates disagreed with this proposal. It is disappointing to learn that the FSA does not feel any of these objections to a cash rebate ban should prevent them from proceeding with such a ban.
When you invest money, there are always three separate charges to consider – charges made by the platform, charges made by the fund and charges made by the adviser.
The reason why cash rebates are so important is that most retail investment funds currently incorporate all three charges within their annual management charge. A typical 1.5% AMC will include 0.75% for the fund manager, 0.25% for the platform and 0.5% for the adviser.
Cash rebates work by returning half of the 1.5% annual management charge (0.75%) to the investor as a payment into their cash account. The platform and adviser charges are then paid from this cash account.
Some investment platforms ‘bundle’ these charges so the investor only sees a single annual management charge of 1.5%. We prefer to operate with an ‘unbundled’ charging structure, so the investor can see explicitly what they are paying in each of the three parts.
Banning cash rebates is not the answer.
Unless all retail funds stop bundling their charges, and stop including the platform and adviser charge in their annual management charges, creating new unit classes for funds and cancelling units to fund platform or adviser charges will be a logistical nightmare.
Instead, the FSA should simply introduce a rule which means all platforms and advisers must disclose what is paid to the fund manager, platform and adviser. Good advisers are already performing this level of disclosure.
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