FSA publishes its draft rules for the regulation of platforms

A consultation paper (87-page / 507KB PDF) has been published on platform services and the RDR, which is a programme of reform designed to improve the low levels of trust consumers have in the retail investment market.

Parts of the paper are a climb-down from the FSA's original proposal to ban fund managers from offering rebates to platforms. Rebates will now be allowed but must be the subject of "improved disclosure" and impartiality in the presentation of products on platforms, according to the paper.

Platforms provide consumers with a consolidated view of their investments and advisers with a mechanism to manage their clients' investment in funds and other investments.

The FSA had previously announced its intention to stop product providers paying commission to financial advisers and to ensure that advisers are paid directly and transparently by clients.  These payments are described as "adviser charges".

The FSA proposes to ban fund managers and product providers from providing a cash rebate from their product charges to consumers if it would be used to reduce an adviser charge. Though cash rebates are banned, fund managers will be allowed to offer additional units of the investment fund as a rebate.

The proposals are aimed at ensuring customers pay the costs of investment advice directly, rather than having costs paid as a commission from product providers, as is currently the case.

The FSA's proposal said that the regulator did not want to ban rebates outright because that would put fund managers at an unfair advantage over life companies which receive rebates from fund managers. 

"We have been particularly concerned that if we were to ban payments by fund managers to platforms while excluding others, such as life companies from a ban on receiving such payments, this could create bias in the market towards financial services firms which deal with fund manager as principal, fall outside the commission ban of the RDR and would, therefore, be able to continue to receive payments from the fund manager," said its paper.

"We have included rules to clarify that product providers cannot provide a cash rebate from their product charges to consumers if it would offset or appear to offset an adviser charge. This is to prevent such rebates from undermining the objective of adviser charging – put forward in the RDR – by effectively replacing commission as a way for product providers to influence adviser behaviour," it said. "We felt there was a risk that some advisers may prefer to use products with large rebates to fund the payment of their charge and possibly represent their adviser charges as paid for by product providers."

Under the proposals, platforms will have to tell customers about income they receive from fund managers and product providers.

The proposals will also force platforms to transfer investments elsewhere without having to cash them in first, a practice which can result in losses and high charges. The proposal also demands that platforms allow investors to exercise their voting rights in companies they have invested in through a fund.

Fund supermarkets operate a bundled charging structure of adviser and platform fees and commissions.

Bruno Geiringer, a life insurance expert at Pinsent Masons, the law firm behind OUT-LAW.COM, said that fund supermarkets had hoped to maintain the existing charging structure.

"The fund supermarkets have lobbied the FSA hard over the last six months to show that their model is cheaper to the customer than the FSA's previous preferred unbundled model," said Geiringer. "These new proposals seem to make a choice between two evils – more disclosure for consumers to read and understand, which the FSA has publicly acknowledged does not work well for consumers; and unfairness to fund supermarkets, who say their way of operating is cheaper."

"Had the FSA stuck to their guns there would have been headlines that the FSA's rules are making it more expensive for investment via platforms on the unbundled basis than via fund supermarkets," said Geiringer. "This is surprising as it can hardly be said that the RDR process has been about making it cheaper for the customer."

Editor's note, 18/11/2010: An earlier version of this story appeared yesterday. It was removed due to inaccuracies which have now been fixed. We apologise for the error.