In April the FCA announced plans to introduce a general ban on the payment of cash rebates to customers who invest in retail investment products from 6 April 2014.
Under those initial plans, cash rebates would only be allowed to be issued after that date if the amount of those rebates does not exceed £1 per month per fund held on a platform. In the case of so-called 'legacy assets', bought prior to 6 April 2014, rebating arrangements above the £1 threshold could continue up until 5 April 2016 after which they would be barred.
However, now the FCA is consulting on new draft rules (361-page / 6.1MB PDF) that will enable rebating above the £1 threshold to continue on legacy assets up until the 5 April 2016 where one of a number of listed alterations is made to the management of those assets after 6 April 2014. One such example is where the products are switched between providers after that date.
The FCA said that where "no change" is made to a legacy retail investment product invested in prior to 6 April 2014 and where a right to a cash rebate applied before that date, cash rebating would be legitimate on those legacy assets. The regulator set out examples of where it would consider 'no change' to have been made to legacy assets.
"The following examples do not entail changes to the retail investment product: ... the product is re-registered to another platform service provider and is otherwise unchanged," the FCA said.
Other examples where the FCA would deem legacy assets to be unchanged is where "the retail client’s investment in the relevant product is transferred from accumulation units to income units or vice versa", or where "the product is converted to a share class which does not pay a commission, remuneration or benefit of any kind to a firm and is otherwise unchanged".
The FCA also said that cash rebates would still be able to be paid on parts of investments that remain after the remainder of those assets are switched to another retail investment product.
In addition, the right to cash rebates would not end where investors reduce the amount that they contribute to investment funds, under the proposals. In those circumstances "the retail investment product provider may continue to pay the cash rebate associated with the reduced investment amount".
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. Whilst the FCA in April outlined plans to curb the practice of cash rebating, it announced that unit rebating – where the rebates take the form of shares or other non-cash investable assets – would be permitted without restrictions.
Both cash and unit rebating is subject to income tax deductions following a decision by HM Revenue & Customs earlier this year. The FCA has said that it expects the rebating model to be largely replaced by a move within the industry to clean share classes as a result of the tax implications.
Financial services law specialist Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said: “Given the previous lack of provision for legacy cash rebates paid to customers, any clarity is to be welcomed. The exceptions will need careful scrutiny in consultation to ensure that they cover all likely scenarios, for instance where additional investment is made and systems allow, can cash rebates on the original investment still be paid? Allowing these rebates to continue will also bring into greater focus the impact of their unfavourable tax position and I would expect there to be further challenge to HMRC’s position.”
