The Financial Conduct Authority has confirmed it will ban platform cash rebates from April 2014, with all legacy business also required to move away from rebates after a further two-year grace period ending in 2016.
After a two-year grace, all business will have to move to a platform charge structure for both new and existing business. The rules regarding new business come into effect in April 2014 and the legacy business sunset clause comes into effect in April 2016.
However, despite stating that the rules will remove all cash rebates and require a platform charge to be paid, clients will still be able to receive ‘de minimis’ cash rebates of £1 or less per unit, as had been previously reported by FTAdviser in February.
As previously planned, the move to platform charging is not total: platforms will still be able to accept rebates that are passed on to consumers in the form of units. However, industry commentators broadly expect a HMRC ruling that would tax such rebates as income to remove this ‘naturally’ in the coming years.
The FCA said that, currently, fund managers generally pay a rebate to some platforms in order to have their products included on a platform. This rebate comes from the annual management charge, which is paid by the investor.
As a result, some platforms are able to give the impression that they are offering a free service, which means that the investor may not understand the true cost of the service provided by the platform.
The FCA said the move was also prompted by a risk that rebates could lead to product bias in the investment market, as products offered by providers who are unwilling or unable to pay a rebate to the platform from their product charges may not have their products available.
The rules apply to both advised and ‘non-advised’ direct-to-consumer platforms, with cash rebates banned for the latter so that platform charges are no longer “obscured”.
Christopher Woolard, director of policy, risk and research, said: “Platforms provide a valuable service but investors are often unclear on what that service costs. These rules ensure that platforms put customers at the heart of their business.
“Customers will know what they are paying and the service that they can expect. These changes will allow both investors and advisers to compare the costs of investing through different platforms and make an informed decision on whether using a platform represents good value for money.”
Mr Woolard gave some level of implicit support to moves by platforms to move to ‘superclean’ shares, saying the FCA was “encouraged to see signs that the market has already started to move to products which have transparent charging structure... in anticipation of this change.”
