First the one subject that has been floating around the longest and has the highest profile: fund manager rebates. It came as absolutely no surprise that cash rebates are to be banned from 6 April 2014 but that unit rebates will, as expected, be allowed providing they are passed on in full to investors by the platforms.
However the recent decision by HM Revenue & Customs that rebates will be taxed in the hands of investors has actually signalled the end of rebates in my view and I cannot see many, if any, platforms implementing unit rebates.
One platform has tested this with its adviser firms and the feedback is unanimous: the future lies in clean share classes and that unit rebates would cause mass confusion and potential capital gains tax liabilities on the end investor so therefore are not wanted. The de-minimis rule allowing cash rebates for distributions under £1, while welcome as it shows that the FCA does listen to the industry, will be redundant. I have always taken the view that rebates can, and do, lead to conflicts of interest and that clean share classes are in the best interests of investors and this paper will see that become reality. From a consumer point of view clean share classes are the only way to enable transparency.
The next topic is what payments from fund managers to platforms will be allowed? Some payments are still allowed including, for example, payments to pay for pricing errors. All of this seems reasonable but the one which is likely to be open to criticism and potential abuse is to allow payments for advertising. The FCA has said that it is aware of this potential abuse and that it expects such payments to be “reasonable and proportionate” or it will consider banning them. It is hard to see how a fund manager would pay more than what he sees as fair for a commercial return – at least until you get into the realms of guided architecture where the place on a best-buy list becomes (implicitly) dependent on payments for advertising. We will have to wait and see how this plays out.
The biggest issue by far to face platforms is the ban on the ability of providers to receive any form of rebate on legacy business from 6 April 2016 – the so-called ‘sunset clause’. This will have a potentially devastating impact on the finances of any provider which has operated a bundled-pricing model at any time in the past and it will have to look at ways to make up practically its entire income from elsewhere. If it fails then it could go bust. Presumably the bundled players will look to do this through introducing an explicit client charge but given that in the past investors might have thought, and maybe even been encouraged to think, that the platform was free, the request for a fee might come as quite a shock. In practice bundled platforms will at the very least have to inform investors of this new charge on their contracts and give them notice so they can move or just cancel their contracts – and who knows what their response will be. Following the publication of the paper some of these bundled providers were giving out messages of optimism and welcoming the paper and even said that they had plans to cope with this, but so far no one has seen the need to share those plans. We will have to wait and see if their optimism is well founded or just a show of bravado, but this decision to ban rebates on legacy business could well result in a disaster or two.
The knock-on effect of banning rebates is that the platforms that benefited from higher rebates, which by the way were usually hidden from public view, is that a number of bigger players are now demanding access to the cheapest share class price stating that a lower price is in the best interests of consumers. I think we would all agree with that – cheaper to the consumer is better. But it is when they say that they only want that cheap share class for their investors (the so-called superclean share classes) that you begin to see their true intentions: to squeeze others out of the market. So far we have seen a few fund managers say that they are not going to comply with these demands and none have said they will comply. The reality is that the fund managers do not need to give in to this pressure and are well and truly shooting themselves in the foot as this new price will surely become the standard market price. Any collusion by fund managers or platforms could well be challenged on the grounds of anti-competitive behaviour.
Finally we should ask what are the practical implications of complying with these new rules? Quite a lot, as it happens, and right up until 2016 so there is a lot of scope for confusion, poor implementation and delays. Judging by the problems some platforms have had in implementing the first phase of the retail distribution review adviser charging, I would say it is odds on that there will be problems. Take for example, implementing the HMRC ruling on taxing rebates. The actual implementation of the rules and collection of the tax is straightforward. But tying this together with the move to clean share classes could easily lead to massive client confusion. Arranging for ‘conversions’ from the old retail share class to the new clean class will become an enormous industry issue affecting fund managers and platforms across the industry and the different parties will naturally want to manage the process according to their own timescales and priorities. Then there is the implementation of new charging structures by bundled platforms, as described above. This will consume an enormous amount of time and resources, with severe penalties for getting it wrong, so implementing the change will tie up resources until 2016.
Is all this change really necessary and worth it? The answer is probably yes. It really is a once in a lifetime shift in the industry and the move to a more transparent market for the consumer has to be a good thing. The previous providers that dominated the industry, the life companies (for the younger reader, most have disappeared in the past 20 years), ultimately killed themselves as everything they offered was opaque, with the result that customers were disappointed with their returns and completely lost confidence in them. It will be worth it in the long run.
Bill Vasilieff is chief executive of Novia
Key points
Cash rebates are to be banned from 6 April 2014 but unit rebates will be allowed
The decision by HMRC that rebates will be taxed in the hands of investors may signal the end of rebates.
The move to a more transparent market for the consumer has to be a good thing.
