Prohibition on cash rebating 'disappointing' as RDR reforms may not be delivering objectives, says expert

Financial services law specialist Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that it was "disappointing" that the FCA had limited the extent to which cash rebates could be paid. In a policy paper (click through for 54-page / 1.21MB PDF) it issued on Friday, the FCA said cash rebates, paid from product providers or fund managers to new consumers, that exceed £1 per month per fund will be banned from 6 April 2014.

Rebating occurs where investors are provided with a refund on part of the charge they pay for products as an incentive for selecting to invest in those products. Platforms often facilitate those rebates from product providers to consumers' platform accounts.

The general ban on cash rebating was announced by the FCA in a policy paper it published in which it unveiled a final set of rules to govern payments to platforms. The FCA said that platforms would generally be barred from receiving payment from anyone other than consumers for the services they provide, but listed some exceptions to that broad rule following a consultation with industry.

"It is not that surprising that the FCA is proceeding with its preferred approach that explicit platform charges have to be disclosed and agreed with the consumer," Geiringer said. "The exceptions, to allow payments for pricing errors, providing management information and advertising are quite reasonable and they ensure the platform industry can work efficiently, so that is fine."

"However, it is disappointing that a simple concept such as cash rebates to the customer could not be allowed to work – for instance, we all know and love cash-back credit cards and even a 'divi' from the local co-operative," he added. "So the concept of a cash rebate is not difficult to understand."

Geiringer said that reasons behind the FCA's decision to place restrictions on cash rebating could be traced to rules set out in the Retail Distribution Review (RDR), which was undertaken by previous City watchdog the Financial Services Authority (FSA).

"The root cause of this strict partition of adviser charge and platform charge lies in the depths of the earliest days of the RDR rules when they were designed to tackle product and commission bias," Geiringer said. "It will be instructive to see later this year the results of the FCA’s post implementation review into the RDR and whether the retail investment market and the general investing public have been well served by the FSA’s RDR reforms or not. Early signs seem to suggest that the experiment is possibly failing badly and the benefits are not coming through." 

"Access to advice has taken a severe blow with the exit of most high street banks from providing advice and adviser firms are being challenged to maintain critical mass from the high net worth market whilst also under cost pressures to make their models profitable," he added.

Geiringer said that the FCA could be forced into a U-turn on aspects of its RDR reforms. 

"Could we see a retail investment market become so paralysed by the RDR that the regulators will be forced to turn the clock back in a few years time and permit cash payments, commission in another name, to ensure the market regains sufficient cash flow? Not everyone can do their own investing on an execution-only platform and some financial advice is always going to be needed for many ordinary people. And the question is, will people be able to find simple advice at a price they can afford?" he said.