Platform provider charges should only be paid by consumers, City watchdog says

The City watchdog has outlined new plans (44-page / 555KB PDF) that are designed to ensure that platforms are not influenced by payments they receive from financial product providers.

The proposals would restrict platforms to obtaining only payment of charges agreed with consumers. The FSA has 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.

The FSA's plans are open to consultation until 27 September 2012 and it wants to bring the new rules into effect from 31 December 2013 to give platforms time to install new systems to comply with the changes.

The FSA said that the measures were in line with new regulations it finalised last year. The regulator said that its reforms to payments to platform operators would give consumers greater clarity about the cost of using the services.

"The way in which the consumer currently pays for the platform service hinders transparency and has the potential to negatively affect competition in the market," the FSA said in its consultation document. "In line with the changes introduced on adviser charging in the Retail Distribution Review (RDR), we do not feel that product providers should be able to 'buy' distribution."

"To ensure the consumer is clear on the cost of the platform, we believe the consumer should pay an explicit fee for the platform service, and payments from product providers to platforms should be banned. This ban would affect both the advised platforms market and non-advised (direct to consumer) platforms that allow consumers to invest directly in retail investment products" it said.

Under the FSA's plans 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. This will present a challenge to the platforms industry which will need to decide whether to spend money to develop the systems to accommodate unit rebates.

Insurance law expert Bruno Geiringer, a partner of Pinsent Masons, the law firm behind Out-Law.com commenting on the FSA's plans said that "Nobody expects these proposals to make it cheaper to invest via a platform when viewed alongside both product and adviser charges, unless the product charges come down which is what the FSA is betting on."

He added that "The benefit is that it will be easier to see the level of charges in future, however that may be a big turn-off for some investors when they see significant charges taken during the life of their investment."

Geiringer also commented on the effects the changes may have on businesses providing platform services. He said that platforms "are being squeezed by the development costs of keeping pace with constant functionality upgrades, which ultimately mean that this is an expensive part of the financial services market to play in. As such, we may see some players looking to bail out or consolidate through a merger as the stakes become too high."

A 'platform' is an online service that allows consumers to manage investment portfolios through an adviser or, in the case of direct to client platforms, by themselves. . 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.

The FSA's proposals are intended to stop distortion in the financial products market caused by platforms offering only the products of providers that pay large rebates. The proposals 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.

"Products offered by providers who are unwilling or unable to pay a rebate to the platform from the product charge would not have their products available to the clients of that platform," it said. "When a platform has been able to negotiate a higher rebate from a fund manager for a particular fund, this is often linked to greater marketing activity being carried out for the fund, with more prominence given to that fund by the platform. In effect, the higher rebate is being used to help secure greater distribution."

Changing the rules would remove the potential that product provider payments influence the range of products hosted on a platform, the regulator said. It added that research conducted on its behalf indicated that consumers do not view platform charges as unfair when they are clearly disclosed.

The FSA said that consumers would benefit from greater competition as a result of its plans as a result of advisers, platforms and fund managers all being subject to price pressures.

It said that platforms are likely to become more consumer focused rather than adviser focused in the advised market and that its proposals help remove the incorrect impression consumers hold that non-advised platforms are free to use.

The FSA conceded that, whilst consumers' ability to make informed choices between platforms would be enhanced in the direct-to-client market as a result of its proposals, it said that there is a risk that some of those businesses will be shifted off-platform.

"The research concludes that platforms are differentiated [from other investment vehicles] because the additional services offered by platforms to advisers and customers are more extensive compared to other markets," the regulator said. "Customers recognise the difference between the services provided by platforms and by investment vehicles in other markets."

"The research suggests that the risks of shifting investment to other offerings as a result of the bans are limited for advised customers, but appear higher for non-advised customers," it added.

Applying the rules to both advised and non-advised platforms prevents consumer confusion which may arise if a consequence of differing rules meant that different share classes were needed for advised and non-advised businesses, the regulator said.

The FSA said its proposals applied equally to 'product wrappers' and that payments could not be made to an associate of a platform.

"Our rules would prevent the platform service provider from receiving remuneration from a third party (other than a consumer) in relation to its platform service; this includes providing the product wrapper via the platform," it said. "Often there is little distinction between the platform service and the product wrapper, and the wrapper is simply a way to facilitate investment into the underlying fund."

"Some firms may decide to charge the consumer one fee for providing both a platform and a product wrapper, or they may decide to split the charge out so a separate fee is charged for the platform service and for providing the product wrapper. Essentially, we expect the platform service provider to be only paid by the consumer for providing either of these services," the regulator added.

In 2010 the FSA set out major plans to overhaul the regulation of platforms following a Retail Distribution Review it had conducted into the retail investment market. In August last year it published final rules aimed partly at providing greater transparency over charges consumers face when using platforms, while also signalling a need for some further research and promising another round of consultation on new draft rules after the results of the research had been considered. The FSA's latest proposals are the result of that research.

The rules announced last August will 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."