The Financial Services Authority has this morning published a Consultation Paper making proposals to improve the regulation of investment platforms ahead of the implementation of the Retail Distribution Review (RDR) at the end of 2012.
The paper, called CP10/28 ‘Platforms: Delivering the RDR and other issues for platforms and nominee-related services’, follows a Discussion Paper published in March and will be followed by a Policy Statement, expected in the early part of 2011.
As a firm of Chartered Financial Planners who make extensive use of investment platforms for the benefit of our clients, we have been paying close attention to this platform discussion and will be responding to the Consultation Paper published today.
CP10/28 sets out a number of proposals to meet the FSA objectives for delivering the Retail Distribution Review (RDR).
In summary, these proposals are:
-banning product charges being rebated to investors in the form of cash rebates
-making sure that investment platforms present an unbiased picture of investments
-forcing all investment platforms to allow re-registration of assets to another platform within a reasonable timescale
We broadly welcome these proposals. Any regulatory change which increases transparency and understanding for the end consumer of a financial product is a positive move.
By requiring investment platforms to present a clear picture of where charges are going, investors will get a better understanding of who they are paying with their money.
One point within the Consultation Paper that we feel needs a response is around the area of cash rebates. In the early part of the Consultation Paper, the FSA appears to be saying that cash rebates to investors will not be banned, as long as they do not appear to be offsetting adviser charges.
Later in the paper, a proposal seems to contradict this view, by saying that they plan to stop cash rebates to ensure that the aims of Adviser Charging are not undermined.
We believe that there is some confusion in these proposals.
To give a simple example; where a retail fund has an annual management charge of 1.5%, it might rebate half of this (0.75%) to the client cash account on a platform in the form of a cash rebate. This is effectively a refund of an overcharge; the 1.5% AMC typically includes 0.5% towards adviser remuneration and 0.25% towards platform costs.
In this example, one of our preferred investment platforms would charge 0.25% per annum for their administration of assets. Our annual adviser charge might be 0.5% in this instance, agreed with the client ahead of the delivery of our advice in our Client Agreement Letter and the personalised engagement letter we provide to our clients.
What is important in terms of disclosure of charges is that the investor can see the cost of three things:
-adviser charges
-fund management charges
-investment platform administration charges
Within the paper, the FSA is proposing that fund supermarket platforms should be allowed to continue with ‘bundled’ pricing, where the fund management and platform administration charges are presented to the investor as a single figure. As a result of the Retail Distribution Review, the adviser charges will need to be presented separately.
Our response to this Consultation Paper will describe the importance of these three charging points and make the argument that cash rebates, when properly disclosed, are a very effective method for paying charges within an investment platform. Banning all cash rebates would be a mistake, with potentially unintended consequences.
Other proposals within the paper are very welcome. The move to ensure that all investment platforms offer re-registration in a timely manner to other investment platforms should give investors a greater deal of control over their assets.
There is also recognition within the paper that a firm of independent financial advisers might use a single investment platform for the majority of their clients, subject to rules on suitability.
This recognises that, increasingly, investment platforms are simply an administration tool offering access to the whole of the investment market with relatively neutral tax wrappers.
Some commentators are already suggesting that the FSA has come under pressure from the big fund supermarket providers, who are keen to see the current environment remain, so they can keep receiving undisclosed rebates for hosting funds on their platforms.
Whilst these proposals do seem to favour a ‘bundled’ approach to pricing when compared to the earlier Discussion Paper in March, they also appear to require better disclosure so investors should know where their money is going in charges, whether they choose a bundled or unbundled pricing structure, with or without advice.
You can read the 87-page Consultation Paper in full here.
