Reaction to FCA’s platform study; Could rebates make a comeback?

Online-Shopping-Supermarket-Platform-Technology-700.jpgAJ Bell’s marketing director Billy Mackay has called for the regulator to consider reintroducing cash rebates from fund managers to platforms to cut costs for consumers.

The ban on cash rebates was introduced in April 2014 following the retail distribution review.

In the terms of reference for its platforms market study, published today, the FCA said it will look into whether platforms offer value for money and are supportive of sound investor decisions. The regulator also said it will review adviser platform choice and whether platforms are competing to attract advisers rather than improve client service.

“One key focus for the FCA will be ensuring platforms are positioned to squeeze the best possible deals out of fund managers on behalf of their users,” Mackay says. “As part of this, the regulator should re-examine the ban on the payment of cash rebates from fund managers to platforms. Provided cash rebates are paid 100 per cent for the benefit of customers, unwinding this ban would enable platforms to use their scale to negotiate discounts for their customers.

“This would help re-instate a more competitive dynamic between platforms and the fund groups and would clearly result in better outcomes for consumers by helping bring fund costs down.”

However, Novia chief executive Bill Vasilieff says he “can’t see any justification for bringing back rebates whatsoever”.

“It doesn’t make sense,” Vasilieff says. “The ban makes it much clearer who is getting what out of the arrangement. I don’t see it happening or what possible reason there could be to reintroduce them.”

Vasilieff welcomes the FCA’s pledge to assess D2C platforms. The regulator has announced it will consider whether investors are “being guided to” overly complex products by firms offering execution-only services, saying: “We will investigate whether complex, high-risk products are used to construct portfolios with various risk levels and the amount of fund flows into these products.”

Vasilieff says: “One area where there is thinking to be done is with D2C platforms, and if they provide guidance to certain funds, whether or not they are straying away from guidance towards advice. This might come under scrutiny.”

The FCA will also specifically look into model portfolios and multi-manager funds, quoting a survey by Platforum that found ready-made portfolios and multi-manager funds are currently used by around a third of retail investors.

The regulator said: “If we observe gross underperformance, we would explore whether this is because the platform has not removed underperforming funds out of the portfolios, not rebalanced (if relevant) and used underperforming in-house funds in their portfolios. If net performance is poor, this may be because the platform has not negotiated upstream charges or put more expensive in-house funds in the portfolio.”

Vasilieff says fettered funds of funds pose “a huge conflict of interest”.

“If funds have a high exposure to in-house funds it will be picked up,” he says. “There has been a huge swing to funds of funds in the last 10 years, but when we look inside many use their own funds. There is a huge conflict of interest of risk-rated multi-manager funds holding their own funds. I think pressure will be put on them to justify why they have picked their own funds to such an extent.”

The Novia CEO also called for a ban on platform exit fees. The FCA has said it will consider whether challenger platforms struggle to compete with their large competitors due to customers facing barriers to switching.

“Some platforms impose exit fees but I would like to see all exit fees banned,” Vasilieff says. “It is customers’ money and they can move it as and when they like. The FCA is doing something similar with pensions, and exit fees are down to 1 per cent, but they should ban them completely.”

Rob Morgan, pensions and investments analysts at Charles Stanley, and Anthony Morrow, co-founder of, agree.

“We find the main barrier to clients moving assets to us is exit fees,” Morgan says. “Limits on exit fees would, in my view, increase competition significantly.”

Morrow adds: “Current pricing levels are too high for what is being delivered for the customer. Whilst “value for money” is subjective, fees in excess of 1% per annum simply shouldn’t be necessary. Good advice can come at a fraction of the costs that are currently being landed on investors – and economies of scale and competition between platforms should be driving further price benefits.”