Fee-based discretionary managers have given support to plans for a ban on kick-backs from fund managers, after the UK’s financial regulators continued their war on rebates in their recent platform policy paper.
The FCA, which recently took over provider regulation from the FSA, issued an explicit warning that discretionary managers will be banned from being remunerated by fund managers, in the paper released late last month.
The paper extended the FSA’s ban on financial advisers receiving rebated ‘commission’ payments from fund managers, which came into force at the end of 2012, to platforms. They will be forbidden from being paid by fund managers – who fund all rebates from the client charges they receive – on new business from April 2014 and on legacy business from April 2016.
The regulator also stepped up previous warnings that a ban on execution-only brokers, life companies and discretionary managers receiving rebates from fund managers would make sense.
“We will also consider other retail markets where rebates can still be paid from one party to another, for example discretionary fund managers, and consider whether we should read similar rules across to avoid the potential for bias,” said the paper.
Frank McGarry, director of business development and marketing at Psigma Investment Management, said he did not expect such a clampdown to have a major impact on wealth and discretionary managers.
He said the FCA was “trying to crack down on these clever workarounds that some firms are doing to maintain the old world”.
He said: “You would hope that things would level out naturally. Those wealth managers who are taking 1.5 per cent on legacy business compared to 0.75 per cent for their peers, their total expense ratios will be much more expensive. What will happen there is that competitive forces will drive that down.”
Mr McGarry said that Psigma does most of its business through institutional share classes, and had long had a preference for doing so, meaning it was not worried by further pressure from the FCA.
“The wider the FCA casts its net the better it gets for the industry. You need total transparency in these things,” he said.
Paul Chavasse, head of investment management at Rathbones, said he welcomed further attempts by the FCA to promote transparency in the industry.
“There are ways for the discretionary industry to get quite a lot of kickbacks, with two ways in particular that are exempt,” he said.
He said that discretionary managers could also still be taking full trail commission-paying share classes and pocketing the commission.
“If you can ringfence the discretionary manager and show there was no advice you could still take trail rebates on that money and I am sure there are people doing that,” said Mr Chavasse.
Mr Chavasse called on the FCA to ban all legacy rebates for discretionary managers and that since 2013 Rathbones had not been taking any trail commission. “We would support the FCA extending its rebate ban to discretionary managers because it is not a level playing field and people do not know it is happening,” he said.
How the regulator has caught up with discretionary managers
Policy Statement 10/06 – March 2010
The FSA first suggests that adviser firms should not be allowed to receive commission set by discretionary managers for recommending their services.
Consultation Paper CP/12/27 – October 2012
The FSA finally lays out the plan to ban kickbacks from DFMs to advisers for recommending a client to the DFM. However, it suggests a kickback could still be given if the adviser does not explicitly advise the end client.
Handbook Notice 125 – December 2012
Confirms the previous consultation paper but says it will consult again on banning all kickbacks and banning legacy trail commission.
Policy Statement PS13/1 – April 2013
Warns that exemptions to the ban on rebates from industries such as discretionary management creates an unlevel playing field and threatens a further clampdown on DFMs.
DFM pricing battle may spark on platforms
Aside from the threat to future rebates or kickbacks in the DFM world, the platform paper will also have an impact on the way discretionary managers use platforms. Most wealth managers have spent the past couple of years forming some sort of model or managed portfolio service for use on platforms, with Novia and Ascentric in particular racking up a large number of DFMs on their platforms. Frank McGarry, director of business development and marketing at Psigma, said the platform paper would give rise to different prices for managed portfolios on different platforms.
“If the platforms want a different price from a model portfolio then they could do a different price because they do not have to do a new share class as they are not unitised,” he said.
Key numbers
66 - The number of DFM model portfolio services that data provider Defaqto has examined and awarded star ratings based on performance and other characteristics.
51% - The proportion of advisers who outsource to discretionary managers, according to a survey from Investment Adviser’s sister publication, Money Management, last year.
