City watchdog bans fund rebates in move to promote transparency
At present, fund management groups generally pay a rebate - also known as trail commission - to many platforms in order to have their products included on it. This annual rebate amounts to as much as half of the average 1.5% annual management charge (AMC) levied by the fund manager.
As a result, some platforms claim to offer a free service, which can confuse investors. It also makes it difficult for investors to compare prices and products available on different platforms, while there is a further risk that some platforms are only offering funds by fund management groups that pay them the rebates.
The City regulator says the changes will make the cost of the platform service clear to investors by ensuring it is paid for by a single platform charge that is disclosed to and agreed by the investor. It will also ban cash rebates because they can be used to disguise the costs of the platform charge.
Justin Modray, founder of comparefundplatforms.com, comments: "This new era of transparency will be great news for customers. As well as giving them the information required to judge whether a platform or discount broker offers value for money, they should also get a clearer idea of whether commercial considerations influence the funds and 'favourite' fund lists promoted by some of these companies.
"Hargreaves Lansdown has already said commercial negotiations will affect the formulation of its Wealth 150 list in future, suggesting investment analysis might not be the only factor determining which funds will be included."
The rules will be introduced on 6 April 2014 for new customers, but platforms will have a further two years - until 6 April 2016 - to move existing customers to the new charging model.
Christopher Woolard, FCA director of policy, risk and research, adds: "These rules ensure that platforms put customers at the heart of their business. Customers will know what they are paying and the service that they can expect. These changes will allow both investors and advisers to compare the costs of investing through different platforms and make an informed decision on whether using a platform represents good value for money."
The news was generally welcomed by platform providers. Some have already begun introducing new charging structures to take into account the expected rule change.
Alliance Trust Savings says the move will "bring much needed transparency to the UK platform market". Managing director Patrick Mill adds: "We have always been supporters of transparency and firmly believe consumers deserve to know and understand the charges they are paying. It is a harsh truth that as a result of these changes many consumers will for the first time realise the true cost of these services."
Adam Seale, acting CEO at Interactive Investor, the parent company of Money Observer, says: "Interactive Investor rebates all trail commission, including legacy trail, to its customers and has been doing so since mid-2012. Eliminating trail is an important step in reducing the cost of investing, but investors who transfer their funds to our platform receive trail commission back now rather than continue paying it away until 2016."
The Association of Investment Companies (AIC) welcomes the changes, not least because investment companies - also known as investment trusts - do not pay trail or commission to fund platforms.
Ian Sayers, AIC director general, says: "The decision whether to include a product on a platform will now be driven by what consumers and their advisers want, rather than whether a product provider has paid for access. Consumers will benefit from a clean pricing model where they will be able see exactly how much they pay for advice, the fund and the platform they use.
"This will allow consumers to compare platform charges more easily, increase competition and improve service standards. It will also encourage platforms to hold a broader range of investment products, including investment companies, which have not paid for access in the past."
The FCA also says that where a platform service provider is also a fund manager, it would not expect the platform to be labelled as "free" if the consumer invests in funds operated by that manager.
This article was taken from our sister website, Money Observer.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.