Out-Law News 3 min. read

FSA says EU plans to allow cash rebates do not 'conflict' with RDR rules


The UK's City regulator said that it does not expect its plans to prevent financial product providers or fund managers from paying cash rebates to investors will "conflict" with EU law, despite a European Parliament committee voting to allow the practice under certain circumstances.

Planned changes to a package of draft new EU financial services laws, known as MiFID II, have been approved by the European Parliament's Economic and Monetary Affairs Committee (ECON). The proposed changes to MiFID II would allow 'investment firms', including platforms, to be paid fees or commission by financial product providers or fund managers under certain conditions, according to a report by InvestmentEurope.

The UK's Financial Services Authority (FSA) has set rules that would ban such practices. However, the regulator said that the planned EU rules changes would not contradict the rules it has set in its Retail Distribution Review (RDR).

"Europe has been well briefed on this [RDR]," the FSA said, according to the InvestmentEurope report. "We don't expect any conflict."

Under the ECON changes, MiFID II would require EU member states to generally impose rules that ensure that investment firms are not paid "any fee or commission, or provide or are provided with any non-monetary benefit in connection with the provision of an investment services or ancillary service" other than directly from their clients. However, such payments would be legitimate if investment firms "clearly" flagged up the "existence, nature and amount" of the fees or commission to investors prior to providing them with a "relevant service".

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 or fund managers in order to feature those products or services, whilst they also charge consumers, or their financial advisers, to use their platform.

However, when the consumers, or their advisers on their behalf, choose to invest in particular products or services through a platform, the product providers and fund managers sometimes issue rebates to customers' cash accounts with the platform. Such rebates are often used to offset what advisers charge for their advice.

The FSA's proposals seek to ban such practices as the regulator perceives 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 or services of fund managers 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 or fund manager services 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, in response (6-page / 260KB PDF) to the FSA's consultation, the UK's Investment Management Association has said that the FSA could be open to a legal challenge by banning commission payments.

"The European Parliamentary Committee has agreed as part of the MiFID review that rebates directly to consumers are acceptable," the IMA said in its response document. "If the UK persists with its proposal to ban cash rebates to investors in funds, then it is not certain that it can ban (directly or via rules on UK intermediaries) cash rebates to investors from non-UK UCITS [Undertakings for Collective Investment in Transferable Securities]. This raises a serious concern about UK competitiveness and might leave the UK open to legal challenge."

The IMA said that it was "quite extraordinary" that the FSA has proposed to "allow rebates to occur in the form of acquisitions of additional units, and to allow adviser charging and platform charging to be facilitated by unit redemptions."

"We find it hard to believe that a consumer is going to understand better a process whereby they appear to have been allocated additional units in the fund (whose value equates to that element of the annual management charge that relates to distribution) but those units (and likely more) are then redeemed to pay the platform and adviser charges," IMA added. "On what grounds does the FSA believe that a statement comprising a series of unit movements will be clearer to consumers than a cash account showing real sums of money being paid to their platform and their adviser?"

The Association of Independent Financial Advisers (AIFA) also recently warned that banning cash rebates would serve to increase "cost burdens" for investors.

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