FSA is going to ‘make discount broking extinct’
Regulator’s platform consultation paper warns that all firms providing a “distribution service” could face cash rebate ban.
Discount fund broking is to become “extinct” as the FSA expands the scope of its cash rebate clampdown to include all types of distributor, a top platform expert has said.
Platforum managing director Holly Mackay said: “Today’s paper raises some serious challenges for discount brokers and that name is no longer relevant or valid. As a species I think they will become extinct.”
Discount brokers sell on funds to consumers by offering them lower initial and annual management charges than investors pay buying the funds directly from the provider, or through advisers.
Such discounts are possible because fund providers hand a certain amount of funds’ annual charges back to the broker in the form of a rebate. The broker then passes on a cash rebate back to the client as a ‘discount’ or ‘bonus’.
For example, broking giant Hargreaves Lansdown is currently offering investment in the £8.9bn Invesco Perpetual Income fund with annual management charges of 1.25 per cent - but the fund normally costs 1.5 per cent a year.
Other major execution-only discount fund brokers include Bestinvest and Chelsea Financial Services.
Ms Mackay said the key point was that now people will have to pay for platforms directly, they will want to feel they are getting something which is a better service.
She said: “Firms out there which have not done anything new for years and give rebates back, it is curtains for them.”
She added: “Hargreaves, Bestinvest and Chelsea have reinvented themselves and offer a broader service. I use Hargreaves Lansdown and they are good at what they do and I am happy to pay for it.”
The FSA’s platform consultation paper this morning saw the regulator firm up plans to ban platforms from passing on rebates to investors in the form of cash - instead they will be forced to pass back fund units.
The paper also warned that, while the current focus is on platforms, other forms of distribution such as execution-only fund broking could come under fire in future - suggesting discount brokers’ cash rebates may be in the firing line.
“So we are seeking views from across the industry on whether we should ban rebates from all firms providing a similar service to platforms – that is, distributing retail investments to retail consumers,” the paper said.
“Such an extension might affect pension scheme providers (including SIPP providers), life companies, execution-only brokers (those that are not already caught by the definition) and any other firm that provides a distribution service.”
(This article was amended on 28 June 2012 to augment Ms Mackay’s comments.)