Platform News: FSA confirm ban on platform rebates

dunstonh

As expected, the FSA has announced today that is to ban fund manager and cash rebates for both advised and execution-only platforms.


It will be introduced on December 31, 2013 with final rules laid out before the end of this year. The cash rebate ban will only apply to new business from December 31, 2013 and not to retail investment products bought before this date. Note that it relates to the investment. So a fund switch or new purchase would be "new".

http://www.moneymarketing.co.uk/wrap-and-technology/fsa-to-ban-rebates-for-advised-and-execution-only-platforms/1053630.article

The FSA is also considering extending the ban to SIPPs following concerns that some have marketed themselves as low cost or even free but are actually funded by provider rebates (which in turn come from fund charges). That is now under consultation as well as extending it to other product types as well. SIPPs, though were highlighted by the FSA. This would suggest these would follow as it would not be logical to have the ISA with rebates banned but the SIPP not.

With the RDR banning trail commission from Jan 2013, you should expect most platforms that rely on commission to move before the end of the year to their new charging structure. Platforms will almost certainly have known the FSA position for a while. It may explain recent charge amendments by some.

cloud_dog

dunstonh, relating this back to the Interactive Investors recent change where they are passing on all trail commission.......

Does this mean that from 2014, for new investments they will not receive and therefore be unable to pass on trail commission?

dunstonh

on investment purchases made post Dec 2012, there will be no trail commission (so no trail to rebate). However, platform commission will still be allowed for another year. On purchases made post Dec 2013 there will be no platform commission. So effectively on all new purchases made post Dec 2013, commission wont exist. So, nothing to rebate

On existing purchases, bought before the respective changes, these will continue to be rebated. However, the FSA hasnt decided yet if rebates can continue in their current form or must be done a certain way.

Most fund houses are unlikely to issue a non-trail version of their funds knowing that within 12 months, that class will be obsolete. Most will go straight to clean share classes. Indeed, this is already happening with the likes of Schroder issuing their class Z funds which are typically 0.75% AMC compared to 1.50% AMC for the current retail versions that pay trail and platform commissions. However, you have Invesco Perpetual who did issue non-trail versions who will now have to issue full clean ones.

As is typical with the news, it trickles out. Deloitte estimates that advice based platforms will suffer a £500k-£1 mill charge on average to adapt. DIY platforms will suffer between £4m an £20m to adapt. With the typical figure being around £8m

Also, ongoing costs will be higher for DIY platforms. Deloitte estimate around £2m a year. The Deloitte research also found that prices charged by execution-only platforms are “generally substantially higher” than advised platforms. Whilst it gives no reasons, I suspect this is because unbundled platforms have been around in the IFA sector for some years and have been booming. The advised bundled platforms have been preparing for their unbundled offerings for a while if they dont already have one. So, they are more prepared. Plus, they do not keep the IFA trail commission that many of the DIY platforms do, in full or in part. So, they will not be losing that.

SnowMan

Access to Financial Services Authority documents on this can currently be found in the first 3 items on this page.

http://www.fsa.gov.uk/library/latest

cloud_dog

Thanks dunsonh

The reason I asked is that some existing II people are making a decision to stay with II based on the existing (increased) II rebate covering most / all of the new quarterly charges.

It might be useful for them to understand that this is short(ish) term situation and may want to bear that in mind. Having said that, before jumping out of the frying pan they need to understand what others will be doing.

gadgetmind

dunstonh wrote: »

This would suggest these would follow as it would not be logical to have the ISA with rebates banned but the SIPP not.

Too right!

There are *very* expensive SIPPs being marketed as low-cost by the likes of HL, and a surprising number of people don't question their spiel.

dunstonh

The reason I asked is that some existing II people are making a decision to stay with II based on the existing (increased) II rebate covering most / all of the new quarterly charges.

It might be useful for them to understand that this is short(ish) term situation and may want to bear that in mind. Having said that, before jumping out of the frying pan they need to understand what others will be doing.

If they dont change the investments they will still get the rebates. Whether it has to buy more units or can be supplied as cash is the unknown bit (currently its usually cash rebate).

However, if we move to post RDR/platform review, then all platforms will need to have explicit charges. So, those moving to another platform now that is still on bundled charging/cross subsidy is going to find themselves going through the same process again when that platform brings in it's charges.

For lazy investors who make no changes, they could in theory keep getting commission rebates forever or stay on bundled forever (assuming platform still caters for them).

talexuser

Have I got this right? In layman terms if you are with a discount house like Cavendish, the rebates on your old ISAs will continue?

But on new ISAs taken out after the final 2013, no rebates, and thus there will be an annual charge to run them up front, but the growth on your funds will theoretically be better due to lower charges?

So whether you win or lose will depend on the size of your total funds, and whether the extra growth due to lower charges is greater than the up front running fees for that size of fund?

How will low cost trackers come out of this?

talexuser

p.s. what happens if you switch your old funds to a better performer within the old rebate wrapper post 2013?

dunstonh

Have I got this right? In layman terms if you are with a discount house like Cavendish, the rebates on your old ISAs will continue?

If I understand the setup right, you are not with Cavendish. You are with a platform that is rebating some or all of the IFA trail commission but keeping the platform commission. Cavendish are not getting it. The platform is.

Trail commission ends on new purchases end of this year. Platform commission ends end of next year on new purchases. Existing purchases made prior to those respective dates allows the platform to keep the commissions.

But on new ISAs taken out after the final 2013, no rebates, and thus there will be an annual charge to run them up front, but the growth on your funds will theoretically be better due to lower charges?

It is not the ISA that matters. It is the purchase of the investments by either new money or fund switches. Lets say the current retail fund is Schroder Income Maximiser. You can today buy that in retail form (with commissions) or class Z form (without commissions - known as a clean share class) and half the price. If you have it before then you can keep it. However, after the relevant dates, you will only be able to buy the clean class version.

So whether you win or lose will depend on the size of your total funds, and whether the extra growth due to lower charges is greater than the up front running fees for that size of fund?

If you look at current unbundled platforms that charge explicitly (as this is the compliant model with the changes), larger investors pay less. Smaller investors pay more. Managed funds are typically cost neutral with maybe a few a bit more but a few less. Expectation is that costs on managed funds will continue to fall.

Passive funds and trackers will no longer be able to be cross subsidised by the managed funds as they currently are on most bundled platforms. They will be the biggest losers.

p.s. what happens if you switch your old funds to a better performer within the old rebate wrapper post 2013?

In theory you should be ok if you re-register but if you cant re-register them then you will lose the commission rebate and will need to purchase the clean share version (which for most people is what they will want anyway).

fimonkey

dunstonh wrote: »

Passive funds and trackers will no longer be able to be cross subsidised by the managed funds as they currently are on most bundled platforms. They will be the biggest losers.
.

All this, plus the fact that smaller portfolio's will also be worse off does not bode well for the economy overall surely? It will scare away the investor such as me who wants to learn about the stock market but in small doses. From small acorns big oak tree's grow, - well no oak tree's will grow at all if these new rules mean young small private investors (like me, who are the future old and large private investors) won't even make a start!