Out-Law News 3 min. read

Banning product providers from paying cash rebates will create 'increased cost burdens' for consumers, AIFA claims


Providers of financial products should not be banned from paying cash rebates to consumers' platform accounts under new rules stemming from the City regulator's Retail Distribution Review (RDR), the Association of Independent Financial Advisers (AIFA) has said.

The body, which represents approximately 16,000 UK financial adviser firms, said that consumers would lose out if the Financial Services Authority (FSA) pressed ahead with its plans to ban cash rebates. Consumers, AIFA claimed, would face "increased cost burdens", as a direct result of the proposed ban.

"We are disappointed with the decision to remove cash rebates to clients as the current system worked well for all parties: consumers, advisers, platform operators and fund managers," AIFA said in response (3-page / 1.16MB PDF) to the FSA's consultation on its plans to ban cash rebates. "AIFA is unconvinced that charges are ‘hidden’ by cash-rebates."

Earlier this year the FSA outlined plans which would mean that investment platforms could only obtain payment for the charges they levy direct from consumers. Currently some platforms receive payments from financial product providers in order to feature those products, whilst they also charge consumers, or their financial advisers, to use the service. However, when the consumers, or their advisers on their behalf, choose to invest in particular products through a platform, the product providers sometimes issue rebates to customers' cash accounts with the platform.

However, the FSA's proposals seek to ban such practices as the regulator has identified problems with the way that some platforms display information about financial products or their providers. Its proposals are intended to stop distortion in the financial products market caused by platforms offering only the products of providers that pay large rebates and are also intended to facilitate price comparisons between platforms for both advisers and consumers.

In its consultation paper, the FSA said that product provider payments to platforms "resulted in a marketplace in which consumers could not easily make price comparisons between different platforms and between the products that are available on those platforms." It said the changes "would increase engagement on the issue of charges and could lead to consumers looking at different platforms in the market" and "should also make it easier for an advisor to compare platforms."

The regulator added that the proposals would lessen 'product bias', whereas currently financial products are presented more favourably because the providers pay larger rebates.

Under the FSA's plans, though, consumers would still be able to receive rebates by way of additional units which the customer may decide to reinvest into the same or different funds.

However, the AIFA 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 AIFA 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."

"The greatest concern that we have is the impact on consumers of rebates in the form of units. Given the complexities that surround the disposal of units and the implications of (CGT), this proposal would be a costly alternative to the current cash rebates. A rebate from the provider to the consumer’s cash account would be clear and distinct from a pre-agreed charge of an adviser to their client," it added.

A system where unit rebates were sold in order to pay platform fees and on-going adviser charges would create "a potential administrative headache" for consumers, the AIFA said.

"Who would decide where the redemptions come from to meet the charge?," the AIFA asked. "Platforms are not in the position to make such a decision as they are not authorised to give advice. 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."

"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 AIFA 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."

The AIFA said, though, that it if independent financial advisers are to banned from receiving payments from cash rebates then so should platforms that do not provide financial advice.

"It is important that a level playing field relating to disclosure is maintained," it said.

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