The latest consultation paper from the Financial Services Authority (FSA) on the subject of investment platforms includes both good and bad proposals, from the perspective of investors.
It’s easy to conclude that the FSA is confused when it comes to platform policy. Pushing on with their original intention to ban cash rebates on platforms is bizarre.
All investors pay three elements of charges when investing their money; fund management, platform administration and advice.
What cash rebates so effectively do at present is return the platform administration and advice elements of the fund annual management charge, allowing investors to pay this cleanly from their cash account on the platform.
This approach is entirely transparent and far easier to administer than the units rebate system that we will be left with once cash rebates are banned in 2014.
Cash rebates work so well because there exists several types of fund share class. Some designed for retail investors include all three elements of charges. Others designed for institutional investors remove the adviser and platform charges.
The new breed of RDR-ready share classes which are slowly being introduced this year remove only the adviser charge, leaving in place an element of charge for the platform administration.
Until we get to a situation where every investment fund has an entirely ‘clean’ share class, only charging for fund management, it is important that we retain the ability to use cash rebates to level the playing field and ensure transparency.
Banning kickbacks
Where FSA policy on platforms does make a lot more sense is their intention to ban fund manager rebates, or ‘kickbacks’ as they are better described.
These kickbacks are the payments made by fund management groups, funded by the annual management charges paid by investors, to investment platforms. We believe they are prolific when it comes to many execution-only investment platforms, where a large share of the annual management charge is being diverted to the platform.
Because these kickbacks are incredibly opaque and create the risk of bias, in terms of which funds are promoted to customers, it is important they are banned.
The continued presence of kickbacks also destroys any chance of downward pressure on fund pricing in the future, as lower fund charges are given up in favour of bigger fund manager rebates to the platform.
What next?
Platforms have until the end of next year to convince fund management groups to introduce clean share classes for each of their funds.
Getting to this stage will create potential tax and transaction costs for investors, resulting in no better position than the current cash rebate system. It will however allow platforms to comply with the new FSA rules and avoid the messy situation of unit rebates.
We look forward to responding to the FSA consultation paper in more detail and helping them understand the real life experience of investors using cash rebates to obtain charging transparency.
