Investment platforms lobbying against rebates ban are not acting in consumers' best interests, 'wrap' service chief says

Providers of platforms, which help advisers to sell financial services products,have claimed that banning consumers from receiving rebates from providers would be detrimental to those individuals' interests.

But Bill Vasilieff, chief executive of Novia, told Out-Law.com that some platforms were only lobbying out of "self interest" and that actually consumers would benefit from rebates being scrapped.

"The FSA are being lobbied that [scrapping rebates] is not in the best interests of the consumer, but in fact nothing could be further from the truth. It is a widely held view that there will be a Retail Distribution Review (RDR) 2 – and that this will cover such things as rebates, and investment information. If you want to make an omelette then you have to break some eggs, it will affect some business models but in the end it is in the best interest of the consumer," Vasilieff said.

There has been a delay in implementing the ban on rebates and some platform providers have said that this could lead to a second RDR being conducted, which could cause further delays to new rules on rebates.

Vasilieff said that while delays would affect the planning that stakeholders in the platforms market could do, ultimately consumers would benefit from a ban on rebates.

"The delay affects the fund managers in that fund managers are acting before they know the outcome, thereby potentially being a waste of money for them," he said.  "Advisers are waiting to see until they decide on their future strategy. Platform providers will be now given more time to lobby behind the scenes, and that is exactly what they are doing."

"There is no need for hidden rebates. Where they are hidden there is a conflict of interest and this is always in the favour of those trying to hide things," he said.

A 'platform' is an online service that allows financial advisers to manage their clients' investment portfolios. Some platforms can be used by customers directly.

In its most basic form, a platform aggregates data from several sources to provide a consolidated view of the client's total investments. Many platforms, however, also provide facilities for investments to be selected, bought and sold. Some platform operators use their platform to sell their own products as well as those of other providers.

There are different forms of platforms. 'Wrap' platforms are paid by providers of certain financial products to feature those products and they also charge consumers. Rebates from product providers are sometimes credited to customers' cash account with the wrap and used to pay the wrap platform fee and any fees the customer has agreed to pay their financial adviser.

Fund supermarkets, however, often follow a 'bundled' charging model and do not usually make an explicit charge to the customer. In such cases, the fund supermarket receives payment from product providers for its services, usually in the form of a rebate of the fund manager's charges.

Products providers may also be charged additional sums by the fund supermarket, for example for having their products on the platform. These are known as shelf space fees. Other fund supermarkets, however, are developing unbundled charging models, charging the client a separate fee.

The regulation of platforms has become an area of increasing focus by the City watchdog the Financial Services Authority (FSA) with an increasing number of consumers turning to platforms as tools for the management of their investments.

In 2010 the FSA set out major plans to overhaul the regulation of platforms following a RDR it had conducted. In August last year it published (73-page / 1.19MB PDF) final rules aimed partly at providing greater transparency over charges consumers face when using platforms.

The new rules force investment advisers to "take reasonable steps" to ensure that their choice of platform does not bias their selection of products for consumers. Platforms are also required to present their products in an "unbiased manner" and they must also "meet the same standards as product providers when they facilitate adviser charging." Platforms are also required to "disclose any fees or commission offered to them by third parties in advance of providing a service to customers."

From 1 January next year a firm making a personal recommendation to a retail client in the UK to invest in a retail investment product will no longer be permitted to receive a commission set by the product provider. Instead, the firm will be paid an adviser charge agreed with the client in advance, under other new rules stemming from the RDR.

However, at the same time last August the FSA backed away from placing an outright ban on "both cash rebates from product providers to investors and product provider payments to platforms" despite admitting that it would be "desirable" to do so. It said it wanted to conduct "further research" on how such measures would impact on consumers before implementing them.

Graham Bentley, head of proposition at Skandia, whose Selestia service is the UK's biggest platform, told Out-Law.com that he believed that the "decoupling" of rules on rebates from the RDR paper meant that from that moment it was "inevitable" that a second RDR would follow on rebates.

A spokesperson for the FSA told Out-Law.com that it would "shortly" publish proposed new rules on the issue of rebates. The FSA had previously said that those proposals would be published by the end of March.

In its Retail Conduct Risk Outlook (RCRO) report (124-page / 6.18MB PDF) at the time the regulator said "conflicts of interest" would remain in the platforms market whilst there were "platform models that rely on rebates from [financial product] providers". That is because those platforms may "allow product bias" as a result of relying on that model, it said.

"Such models can also prevent access to funds that do not pay rebates and can hinder transparency of charges," the FSA had added.

The FSA spokesperson said that the regulator is aware that banning cash rebates would force some platforms to alter their business model. It said platforms would be given time to conform to any new rules and that enforcement of those rules themselves would "not be in line with the implementation deadline of 31st December" which is the last day before the other RDR comes into affect.

"It remains our intention to ban platform providers from paying cash rebates and we hope to put out our consultation paper on that shortly, although we have no fixed date for that," the spokesperson said. "We know that industry is expecting it. That consultation paper will bear in mind that if we pursue that intention it would require a substantial change to business models and we have taken that into account."

The spokesperson said that an "appropriate transition period" would be put in place to allow platform providers to change their business models. What would constitute an 'appropriate transition period' was not clarified, but the spokesperson said that the regulator recognises "that platforms need to have a reasonable amount of time to implement any changes".

"We would not expect platform providers to implement these changes within a couple of months," they said.

The spokesperson said that assertions that a second RDR would follow as a result of the delays were merely down to how the process for implementing changes to the rebates rules was being "labelled".

"Our objective has been to assure that there is no kind of commission bias," they said. "Within the area of platforms some of that bias does exist and that is in an area we feel we need to take action on. Consumers who want to hold all of their investments on a fund platform should know how much they are paying for that and how the structure works because currently that is not clear to the investor."

The FSA has said that rebates in the form of "units" rather than cash could be allowed providing they are paid in full to consumers. 'Units' refer to rebates in the form of shares or other financial products rather than in cash form.

Graham Bentley of Skandia said that "unit rebates are in the best interest of customers and fund groups" and should not be banned.

From a customer's perspective Bentley said unit rebates "enable customers to achieve lower net fund costs through platforms’ scale and purchasing leverage". He said this is "in line with FSA’s stance on lowering charges for investors." He added that unit rebates provide consumers with a discount on the amount they have to pay in an annual management charge for the fund and that they are preferable to cash rebates because "customers place money in funds to invest, not to hold cash."

Bentley said fund groups would also benefit from "higher fund values or revenue" as a result of units being reinvested and that they were also more "simple" from an administrative point of view. "They require no change for fund groups – platforms administer the rebates as per current practice," he said.

Unit rebates also enable fund groups to "operate single share-classes with price flexibility" where they can offer incentives to use platform services by reducing the basis point charge they levy on shares managed via platforms, Bentley added.