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FSA reconsidering proposed ban on cash rebates to consumers via platforms

The regulator is reconsidering its proposed ban on all cash rebates paid to consumers who have their investments managed through platforms, according to press reports.22 Feb 2013

Money Marketing reported that the Financial Services Authority (FSA) could soften its proposed outright ban and instead allow small cash rebates of £1 or less to be paid by individual funds on a monthly basis into consumer accounts.

The rethink has come as a result of feedback from the investment management industry following last year's consultation on the proposals. The regulator told that it was considering all responses to the consultation and would publish final rules later this year.

A platform is an online service that allows consumers or advisors to manage investment portfolios. Many platforms also provide facilities for investments to be selected, bought and sold. Rebates in a platforms context can be issued by product providers whose products have been selected for investment by consumers or advisers on their clients' behalf.

In its June 2012 consultation paper, the FSA proposed banning the payment of any rebates as part of wider changes preventing advisers from receiving payments for their services from anyone other than the client. The new rules would take effect from the end of this year to give platforms time to install new systems to comply with the changes. They would prevent platforms from being funded by product providers.

In the consultation paper, the FSA said that the current arrangements lack "transparency" and have "the potential to negatively affect competition in the market". Product providers would be permitted to issue 'unit' rebates to clients' platform accounts, representing a value that the client could reinvest in particular products offered by the provider, rather than a cash payment.

Money Marketing said that the FSA's change in position on cash rebates stemmed from a response to the June consultation paper by industry body the Tax Incentivised Savings Association (TISA). In its response, TISA warned that banning cash rebates outright could result in increased operating costs for market participants and suggested that the FSA's approach assumed that "the current market is not working well for consumers". It called on the FSA to allow product providers to continue to make small cash rebate payments, of up to £10 per portfolio, without falling foul of the ban.

In a subsequent article, Money Marketing reported that platform providers had criticised reports that the FSA was softening its position on cash rebates. Providers felt that the change would lead to "further confusion" in the market, and called on the FSA to either ban rebates outright or allow the current system to continue.

Insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind, said that the "diverse reaction" from the industry was "as interesting as the news itself". "What is very clear from the reaction is that platform providers themselves can't agree on whether cash rebates are a good thing or not, and that is as much a sign as anything," he said.

"I have always thought that getting a cash rebate into your cash account is pretty easy to understand and not necessarily a bad thing," he said. "When that rebate then becomes the client's money it can be used as the client wishes, including if they want to use it to pay their adviser's fee. What does it matter whether the client pays the adviser's fee from the platform cash account or a bank account? It's still the client's money."

Cash rebates would likely mean more to a client than unit rebates, which the FSA plans to continue to allow, he said.

"That said, there is benefit in having better transparency, clean funds and reducing the fund charge and these seem to be the factors driving the FSA's approach," he said.