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Created on Wednesday, 17 August 2011 00:00

The recent FSA platform paper leaves many questions unresolved. From my perspective the principle issue is the uncertainly regarding payments from fund providers to platforms. It is not an exaggeration to say that this issue alone will be the primary driver of investment costs in the industry in future years.

In the absence of clear direction from the FSA, Advisers must now be wary of platforms whose revenue models rely upon retrocession (trail) from other investment bodies: the “bundled” charging mechanism. By definition, the future charges of such platform providers are now unknowable. It is difficult enough for an Adviser to price their own services, when setting a reasonable total cost is a constraint, without the additional constraints of uncertain platform costs.

In any case, I cannot see any benefit to clients in bundled charges. I do not believe that they improve the quality, reduce the costs nor increase the availability of investment services to the UK retail financial consumer.

Market pressures operate best when pricing is overt and simple. Disclosure of remuneration paid by other parties, no matter how “transparent”, does not substitute for proper competitive forces. It is unquestionably true that bundled pricing is often seen as cheaper (or even free) than unbundled by consumers (and even occasionally Advisers). The face of bundled charging is concealed by a promise of discounts to initial and ongoing fund charges. That the majority of these discounts are actually retained by the fundsupermarkets is much harder to identify.

Lord Turner said “In the past the FSA’s regulatory approach was based on the assumption that effective consumer protection would be achieved provided sales processes were fair and product disclosure was transparent. But this approach has not been effective in preventing waves of severe customer detriment”. So, in product design, the FSA themselves see disclosure as ineffective. I agree.

So, I am delighted to see that payments from product providers will be banned. This bizarre proposal, if combined with a ban on such payments being made to the client, would only have shifted pricing power from fund managers to those platforms with bundled charging structures – it could not offer any conceivable benefit to the underlying client.

But I still fail to see why platforms are prohibited from paying any rebates received to the client. If some thoughtless Advisers chose to peg their fees at that level, so be it. That is still not the same as “commission by the back door”. Those advisers must still charge directly for their fess whether on platform or off. All it means is the availability of cash to meet such fees so exactly the same argument could be applied to dividends or interest earned on platform. But there is one major market benefit of retaining the right to negotiate and pass provider payments to clients. How otherwise is downward pressure on the fund managers’ own charges to be maintained?

Parmenion uses either institutional units or retail units within its underlying investment solutions. Administratively we prefer to buy institutional but on occasion we find that better terms can be achieved by negotiation with the underlying manager by enhancing rebates from the retail units.

These we rebate in entirety to the client unlike the fundsupermarkets which retain the majority of these rebates. Despite receiving no benefit from these rebates, we are motivated to continue to negotiate the best available terms to keep the TOTAL costs of services accessed through our company as competitive as possible.

 If the FSA ban the payment of these rebates to the client we clearly have no motivation to continue to negotiate terms and more importantly the fund managers have no reason to agree. Without this mechanism both the much desired introduction of retail units without retrocession will be delayed and partial, and more importantly the final charges applied will be higher. The net result is likely to be higher ongoing costs to the consumer.

It is probably wise to postpone the introduction of product provider rules. The picture is complex and the eventual market effects difficult to predict. But a blanket ban on provider retrocession may simply embed, permanently, a higher cost structure into the industry than permitting service providers to continue to negotiate terms for the benefit of their clients.