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Tax clarifications required before platform rules are finalised, says FSA

The Financial Services Authority (FSA) will not set out finalised rules that platform providers will have to adhere to under its Retail Distribution Review (RDR) reforms until HM Revenue & Customs (HMRC) has clarified rules on the "tax treatment" of rebates and other payments, the regulator has said.03 Dec 2012

A spokesperson for the FSA told Out-Law.com that the tax issues would have to be addressed before the finalised platform rules would be published, and that it is likely that there will be a delay to the timetable for implementation of the rules that the regulator had previously proposed.

In a consultation paper published in June, the FSA outlined plans designed to ensure that platforms are not influenced by payments they receive from financial product providers.

Under its proposals platforms would be barred from receiving payment from product providers and instead would only be able to receive payment from consumers. The FSA also announced that it would ban product providers from issuing cash rebates to consumers' platform accounts under a drive to increase transparency and eliminate 'product bias' in the platforms market.

At the time the FSA said it was its intention to bring the new rules into effect from 31 December 2013, a year after the RDR rules affecting other stakeholders in the industry come into law, in order to give platforms time to install new systems to comply with the changes.

The FSA spokesperson told Out-Law.com that it is still the regulator's intention to give platform providers a year from the date that the finalised platform rules are published before the rules would take effect, in order to account for the significant change those rules will have to platform providers' business models. However, they said that it does not now intend to publish the finalised rules until some time next year.

"The FSA's 'payments to platform service providers and cash rebates from providers to consumers' consultation] closed for responses at the end of September," the FSA spokesperson said. "Responses raised a variety of questions including the tax treatment of rebates and payments to platforms. We are taking the points raised into account and we understand that HMRC is working on clarifying the tax position. We intend to publish the Policy Statement in 2013."

Cash rebates in a platforms context are currently paid to consumers' platform accounts. They are issued by product providers whose products have been selected for investment by consumers or advisers on their clients' behalf. Often a portion of the rebates are used to offset what advisers charge clients for their advice.

However, from the end of this year new rules established by the FSA will prohibit advisers from receiving payments for their services from any one other than their client. The regulator has therefore outlined its intention to ban cash rebates, and has instead proposed to allow product providers to issue unit rebates to clients' platform accounts instead. The units would represent a value that clients could reinvest in particular products they are offering.

"Our view is that cash rebates hinder transparency and potentially provide a mechanism for commission to continue being paid," the FSA said in its consultation paper.

However, the FSA's plans were criticised by the Investment Management Association (IMA) and the Association of Independent Financial Advisers, since renamed the Association of Professional Financial Advisers (APFA), in responses the organisations submitted to the FSA.

The IMA said that the proposals would disadvantage investors, whilst the APFA said that consumers could be taxed for rebates they receive in the form of units. It said that consumers should be allowed to choose to pay financial advisers with the money they receive from cash rebates.

"Allowing unit rebates whilst banning cash rebates will limit choice and create administrative, Capital Gains Tax (CGT) and increased cost burdens for consumers," the APFA said in its consultation response. "Maintaining cash rebates that are clearly disclosed gives consumers the choice of how their advisers will be remunerated. An adviser charge paid from a cash account is convenient and often a consumers preferred method of payment that currently works well."

"Any unit sale is a disposal for Capital Gains Tax (CGT) purposes and when a share or unit is sold the CGT base cost is the average acquisition cost of all shares or units in the same underlying undertaking. Therefore if a fund manager credits a number of units to an investor each month and then each month the units are sold it means that the average acquisition cost of the holding would have to be recalculated monthly," it said.

"This calculation is fiendishly difficult and the bulk of platform providers to not have the ability to provide the information. If the investor has a dozen holdings this would necessitate a dozen separate calculations," the APFA added. "The upshot will be a lot of unreported gains through ignorance and the risk of regulatory action from HMRC against investors, or additional expense for investors paying someone to do the calculations for them. The imposition of such onerous tax compliance will significantly increase the cost of investing for consumers."