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27 June 2012

FSA Consultation Paper: 'Payments to platform service providers and cash rebates from providers to consumers' [RDR]


In its paper, the FSA says that in line with the changes introduced on adviser charging in the Retail Distribution Review, it does not feel product providers should be able to "buy" distribution. The ban would affect both the advised platforms market and non-advised (direct to consumer) platforms.

In its Policy Statement PS11/9 published last year, the FSA said that it would be desirable, in principle, to ban payments by product providers to platforms and cash rebates to consumers. This Consultation Paper sets out the regulator's policy proposals and draft rules for the Handbook, taking into account the findings of the research recently conducted on the platform market.

Timing of the change

1.8 The FSA said in PS11/9 that any rules it introduces in this area would not come into effect until after the introduction of the RDR rules on 31 December, 2012. The research indicates that many platforms are already introducing an unbundled pricing model in time for the RDR, so charging an explicit fee for the platform service is unlikely to need significant further systems development, although it implies a considerable change in business model for some platforms.

1.9 Introducing the systems required for unit rebating may be more complex, with the time and costs required to introduce this differing significantly between firms. Based on the information the FSA has obtained from firms, it considers that introducing the changes on 31 December 2013 would give firms sufficient time to make the necessary changes. The FSA aims to publish the Policy Statement confirming the final rules before the end of 2012, which would give firms over a year to make the changes. The regulator also expects adviser behaviour to bring about change in this market, with advisers looking to use those platforms that will help support their move to an adviser charging model.

Advised business

2.9 The FSA believes fund prices remaining at current levels, with commission and platforms costs built in, is unlikely for a number of reasons. In particular, in the run-up to the RDR it is already seeing an apparent increased focus on charges (including fund costs) with transparency and adviser obligations enhancing that further. The FSA expects this to continue to put pressure on the headline price of funds. With the introduction of clean retail share classes, advisers would find it difficult to justify recommending funds that are priced at a significantly higher level. The competition analysis research has indicated that the policy proposals are likely to lead to greater price competition. This should help to put pressure on providers that are reluctant to re-price their products as a result of the RDR changes.

2.10 The competition analysis undertaken by Deloitte suggests the proposals will enhance the positive consumer outcomes of the RDR. There will be increased transparency in the cost of the platform and also an impact on the price of fund management. In addition to increased pressure from consumers, there is likely to be stronger adviser pressure on prices in both the platform and fund manager market. Platforms will need to justify their proposition to the end consumer more clearly than is the case at the moment, given that the consumer will know the cost of the platform service. This should lead to platforms focusing more on attracting consumers and on features that work for their benefit. Currently, platforms used by advisers tend to attract business by designing features that will attract advisers to the platform, rather than primarily focusing on the needs of the end consumer.

2.11 The findings of the research support the FSA's proposed ban on payments by product providers to platforms, by suggesting that the ban is likely to enhance the positive consumer outcomes of the RDR. 

2.12 Advisers, platforms and fund managers all provide a distinct service to the end consumer. In the regulator's view, each of these services should be priced to reflect the work being carried out for the consumer, rather than being priced at a level that often bears little relation to the cost of providing that service. The Deloitte research suggests that the proposed bans would exert competitive pricing pressure on each element of the service, as in a post-RDR environment where adviser charging rules would be in force, advisers will need to justify their costs to consumers.

Payments and rebates to consumers

2.24 The FSA is concerned that these cash payments could potentially act as a proxy for adviser commission and undermine the RDR rules on adviser charging, which will no longer allow product providers to determine the amount of adviser remuneration. The research findings appear to support the regulator's view that, if it continues to allow product providers to make cash rebates to the customer’s cash account on the platform from which the adviser charge is taken, there is a potential danger that the link between product provider and adviser remuneration could remain intact.

2.25 It is also clear from the research that communication to consumers around cash accounts could be improved. As part of the RDR, consumers will now be agreeing the level of adviser charges and how these should be paid with advisers; if the consumer uses a platform this is likely to be from a cash account.

Press release

CP 12/12



© FSA - Financial Services Authority


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