FCA platform market payment rules and cash rebating ban outlined

Out-Law News | 26 Apr 2013 | 1:52 pm | 4 min. read

The Financial Conduct Authority (FCA) has confirmed that there will be a general prohibition on platforms receiving payments for their services from anyone other than consumers under new rules it has announced.

The financial services regulator has, though, outlined exceptions to the ban in its final platforms paper (click through for 54-page / 1.21MB PDF) to allow payments to platforms from product providers and fund managers to be made under certain limited circumstances.

One of the carve outs will allow product providers to make "payments in relation to advertising products on the platform" without falling foul of platform charging rules.

"We continue to believe that the best way of improving transparency in the platform market and removing the potential for bias is by ensuring the consumer pays a platform charge to the platform for the service provided," the FCA said in its platforms paper. "Consumers currently pay for platform services, albeit in some cases through their annual management charge. Making this clear to the consumer should help both consumers and advisers to compare different platforms and make a value-for-money judgement on whether a particular service is suitable."

"Nevertheless, the industry has made a reasonable argument that there may be some services that a platform could continue to charge a product provider for. In particular, platforms may sometimes incur unforeseen costs as a result of actions by a product provider that are essentially one-off in nature, such as correcting a pricing error or dealing with a corporate action. When these result in additional costs that are one-off in nature, the platform should be able to charge the provider directly for these. If these events do not occur, we would expect no payment to be made," it added.

"We can also confirm that it was not our intention to prevent payments made for advertising. However, we do not expect payments for advertising to be used to help a product provider gain access to a shortlist of funds, influence any ranking of products, or otherwise result in a channelling of business to that product provider," the FCA said.

The regulator said, though, that it would take action against companies that "abuse" the exceptions in order to "influence distribution".

"If we see any abuse of the rules in this area, we will consider banning all types of payment between a product provider and platform service provider," the FCA said. "It was not the intention to prevent platforms being paid by intermediaries for any services they provide to an intermediary firm, and we have clarified this point in the rules."

The regulator said that it could also make execution-only and self-invested personal pension (SIPP) market operators subject to the new platform charging regime in future. It said it would consult on any rules it decides to impose.

The new rules will take effect from 6 April 2014, however the FCA said that it would continue to allow "legacy" payments from product providers to platforms to continue until 5 April 2016 where the arrangements have been put in place before 6 April next year.

"By ‘legacy payments’ we mean payments that relate to those retail investment products held on a platform before these rules coming into effect and which the platform is still holding when the rules are in force," the FCA said. "These include regular savings products (where the amount invested does not vary) and any changes made through rebalancing as a result of instructions given before the implementation of the rules."

"The transitional rules provide that the platform charge would only apply to new assets on the platform. Events that would trigger a move to the platform charge include when a fund on the platform is sold or changed. This revised approach would provide firms and consumers with flexibility to determine when to switch away from legacy assets. At the end of the two-year transitional period, however, platforms would not be able to retain any rebates for legacy business, but would have to be funded by platform charges only," the regulator said.

The FCA said that it would allow cash rebates to be paid from product providers or fund managers to consumers through consumers' platforms accounts providing the amount did not exceed £1 per month per fund held on the platform. Unit rebating would, however, be permitted without restrictions. Rebating occurs where investors are provided with a refund on part of the charge they pay for products as an incentive for selecting to invest in those products. Platforms often facilitate those rebates from product providers to consumers' platform accounts.

Both cash and unit rebating is subject to income tax deductions following a decision by HM Revenue & Customs late last month. However, the FCA said that it expects the rebating model to be largely replaced by a move within the industry to clean share classes as a result of the tax implications.

"Given that maintaining fund prices at levels with commission built in and then rebating a significant proportion of this to the consumer could be disadvantageous from a tax perspective, we would expect to see a significant move towards ‘clean’ (commission-free) share classes as consumers become aware of their existence and of the tax treatment of rebates," the FCA said.

The FCA said that platforms could have to pay up to £61.8 million in one-off costs in order to comply with the new rebating rules, and that further ongoing costs of up to £13.8m could also be incurred. However, the regulator said that the new rules would secure "an appropriate degree of protection for consumers" and promote "effective competition" in the market.

"One of the main outcomes of our rules will be to restrict the influence that product providers and platforms have on the promotion of one fund over another," the FCA said. "This outcome is in line with our broader Retail Distribution Review (RDR) objective of limiting any adverse influence product providers have on distribution and aligning the interests of intermediaries to those of their clients more closely."

"These rules promote effective competition in the market by removing product provider influence over the distribution of products and adviser remuneration and improving the clarity of services offered by firms to consumers. The distribution of funds will also not be influenced by rebates from product providers to platforms, and platforms will have to become more transparent about the services they provide to justify their charging structures to consumers," it added.