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Home > Regulation > RDR News & Analysis

By Nick Reeve | Published Oct 01, 2012

RDR ‘may face legal challenges’ after European rebate vote

European politicians’ decision to vote against a Europewide ban on adviser commission and cash rebates to clients throws a spanner into the works of the FSA’s RDR project, according to fund managers.

As part of the RDR, UK watchdog the FSA has banned distributors from receiving commission and, in a recent paper on platform regulation, also proposed a ban on cash rebates being handed to consumers - as it presses to avoid all forms of ‘commission bias’ in product sales.

But the European Parliament’s economic and monetary affairs committee last week voted to reject a Europewide commission ban and also said that rebates direct to consumers “are acceptable”, as it finalised amendments to the Markets in Financial Instruments Directive (Mifid).

The IMA said if these rulings became law the FSA would not be able to ban European-domiciled funds from continuing to pay cash rebates to UK investors, since the FSA cannot regulate funds domiciled outside the UK.

This could create a situation in which fund managers simply have to move their funds to Europe, domiciling them in fund centres such as Luxembourg or Dublin, and then passport them in for UK distribution to avoid the cash rebate ban.

In the IMA’s response to the FSA’s consultation on payments to platforms, Andy Maysey, senior adviser for retail distribution, said: “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.

“This raises a serious concern about UK competitiveness and might leave the UK open to legal challenge.”

The European Parliament said in its Mifid discussions that cash rebates enabled smaller investors to benefit from the purchasing and negotiating powers of large fund buyers.

Ucits funds - which are able to be sold throughout the European Union regardless of which EU country they are domiciled in - are not directly regulated by the FSA. This means FSA rebate rules would not be enforceable directly on Ucits funds based in Luxembourg or Dublin and sold into the UK.

The IMA added that the ban on fund managers passing on cash rebates to consumers would hamper their ability to facilitate adviser charging, while banking and insurance providers could still facilitate this function.

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