FSA must give platforms industry clarity on issue of cash and unit rebates, says expert

Insurance law specialist Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that the platforms industry risks being left "out of kilter" with the rest of the retail investment market the longer the regulator takes to determine rules affecting platform providers under its Retail Distribution Review (RDR).

Whilst most of the RDR reforms to the retail investment market were brought in on 31 December 2012, the FSA previously outlined its intention to impose reforms specific to platform providers from the end of 2013. However, in December the FSA told Out-Law.com that the platform market reforms would not take effect until a year after it had published its finalised platform rules.

The FSA has now confirmed that it intends to publish its policy statement between April and the end of June this year, meaning that it will be spring 2014 at the earliest before the rules come into force.

The regulator refused to comment on speculation that it was considering banning unit rebates from being paid to investors' platform accounts. New Model Adviser has reported that the FSA is considering prohibiting unit rebating following consultation with HM Revenue & Customs (HMRC) on tax issues relating to the practice.

Rebates in a platforms context can be issued by product providers and fund managers whose products have been selected for investment by consumers or advisers on their clients' behalf. Rebates can take the form of cash or units, with the latter representing a value that clients can reinvest in particular products.

In its draft platforms paper published last June the FSA proposed placing an outright ban on cash rebates after raising concern that the practice lacks "transparency" and has "the potential to negatively affect competition in the market". Its concerns centre on the practice of rebates being paid to clients and used to offset the fees financial advisers charge for making retail investment recommendations.

Under the RDR reforms which took effect at the end of last year advisers are barred from being paid by anyone other than their clients for making those personalised recommendations. The adviser charging rules were established by the FSA after it found there was a risk of 'product bias' where advisers were able to obtain commission from product providers for recommending their products to clients.

In its draft paper though, the FSA outlined its intention to permit unit rebating under the reformed framework.

However, the FSA's proposals drew criticism from industry bodies. The Investment Management Association (IMA) said that the move would disadvantage investors, whilst the Association of Professional Financial Advisers (APFA) warned that investors could be taxed for rebates the receive in the form of units and that they could be forced to make "fiendishly difficult" calculations about the amount of tax they would owe as a result.

In addition, the Tax Incentivised Savings Association (TISA) said that banning cash rebates outright could result in increased operating costs for market participants and suggested that the FSA's approach assumed that "the current market is not working well for consumers". It called on the FSA to allow product providers to continue to make small cash rebate payments, of up to £10 per portfolio, without falling foul of the ban.

The FSA told Out-Law.com that it has been "engaging with a number of stakeholders, including HMRC" on its platforms policy proposals. Bruno Geiringer of Pinsent Masons said that regulator must give stakeholders clarity on the issue of rebating.

"Unlike units added to a life and pensions product as a loyalty bonus, adding units to a collective investment fund could lead to complex capital gains tax (CGT) calculations which, it would appear from the New Model Adviser report, is causing problems for the FSA and HMRC to reconcile with the objectives of the RDR for platforms," Geiringer said.

"The attraction for the FSA was that unit rebates did not have the quality of being immediate cash which could be used to pay the platform or adviser charge. But the consequences of allowing unit rebates would be to sacrifice transparency as well as landing customers with potentially additional CGT and tax reporting obligations which is not ideal," the expert said.

Recent press reports have suggested that the FSA may be willing to allow small cash rebates to be paid under the new rules affecting platforms.