As the consultation process has progressed I have been consistent in my stance that the FSA’s key proposals will not result in a position which is of benefit to the majority of consumers. I don’t doubt that the starting position of the FSA in respect of this consultation was sound. Unfortunately this does not reduce my disappointment with some of the outcomes.
So what did the consultation paper say? This will come as no surprise to those who have been following the various consultations:
The latest consultation paper was a little unusual. Previous papers have set out a case for and against each proposal and then confirmed the FSA’s preferred position. Unusually, on this occasion the consultation was accompanied by over 300 pages of independent research. It felt at times as though this consultation was a re-stating of the FSA’s preferred position with the findings from the research used, though on a few occasions either stretched or ignored, to support their stance.
Before briefly summarising my views on those proposals affecting the advised market it is worth confirming that I am agnostic on the matter from a business perspective. We operate both a bundled and unbundled charging structure accommodating investments where we receive a payment and those where we don’t. We don’t promote either model but just give as wide an investment choice as is administratively possible.
The FSA’s concern with payments from product providers to platforms is based on a perception that fund groups grease the palms of platform operators in return for increased marketing exposure.
This starting point concerns me for two reasons. Firstly, platforms have driven fund groups’ charges lower. The FSA’s proposals will reduce, if not remove, the incentive for many platforms to drive these costs down in future.
Secondly, I believe the proposal is an insult to the integrity of the adviser community. Advisers should have robust processes for determining which investments they recommend and will filter marketing noise coming from a platform. The FSA can prohibit “shelf space” agreements and other methods by which product bias can be achieved by indicating that it expects independent advisers to use platforms offering a full range of investments. In a congested platform market, what advisers want they get. If advisers tell platforms they don’t want promotion of investments it won’t happen.
As we would all expect, the research clearly established that advised clients see their relationship as being with their adviser. From this starting position you would also expect, as was found, that advised clients would struggle to articulate the position with platforms and fund groups. That does not create a mandate for changes in that relationship.
The research also concluded that advised clients were most interested in overall costs and how they would affect their investment return. Unbundling the platform charges adds no value to the typical advised customer. Interestingly, many did recognise there would be no one to challenge fund managers’ costs if platforms weren’t incentivised to do so.
The fact is that most advised customers appear to be happy to be charged 100bps by the fund group and for the platform and fund group to fight it out over who gets what. In truth they were happy paying 150bps to include the advisers’ charges, but it is a little late to change that one.
Our own adviser survey suggests that, in the main, advisers are in favour of the shift to unbundling. I can see that there is something intuitively attractive about it. The momentum behind the change may therefore make my arguments redundant but I do think we need to be careful what we wish for.
Even where customers express a desire for more choice and transparency, they will not necessarily appreciate it when it arrives. I suspect they will be the first to express a desire for charging simplicity.
It is hard to muster the energy to restate my position on cash rebates to customers. I was one of those in the industry asked to participate in the research which led to the lengthy Deloitte paper which accompanied the consultation. I thought they had accepted that cash rebates were not a proxy for adviser remuneration, alas no.
Instead comments from the research that customers did not see cash accounts as being “accessible” have been translated in the consultation paper to mean that the customer did not view these as “their own” money. Accessibility and ownership are two very different concepts.
In my view, the research contained more than enough evidence to make a case for the retention of cash rebates. Unfortunately it appears that this die had already been cast.
The implications of the ban on cash rebates are wide-ranging, which only adds to the argument that the case for banning them needs to be unequivocal. Customers will need to retain sufficient cash in their platform or product cash account to pay charges which will be both clunky and unpopular with both advisers and customers.
Of course the “good news” is that unit rebates will continue. It will be interesting to see how many platforms make use of this option.
It is beyond my intelligence to work out what question is being asked when unit rebates are the answer. Will fund managers pay rebates as a scrip issue of shares/units to the platform or will the reinvestment into the relevant fund only happen after an interim cash payment (definitely not a rebate though) from the fund manager to the platform. If platform charges are taken as part of this process then the customer will not see these charges via the cash account and, in reality, the world will look no different through the eyes of the customer.
Although the FSA states that it expects a unit rebate to be invested back into the fund generating the rebate this isn’t specified in the draft rule changes. An alternative would be to invest all rebates into a cash fund. This would keep separation from the cash account and feel more accessible to the customer than their other investments. This is of course against the spirit of the consultation paper.
So, which of the FSA’s objections to the current model does banning cash rebates solve? The customer still has a cash account, so no change to the inaccessibility problem. If charges are deducted from the cash account, customers are more likely to run out of cash every now and again. They will also almost inevitably hold more cash than they really want to, so a loss in feeling of control there. If unit rebates are applied, their transaction summaries will run to many tens of pages – simplicity and clarity anyone. Finally, if platform charges do end up being wrapped up with unit rebates, it will be interesting to see what future customer insight research tells us about customer engagement and understanding.
Having set out some of my arguments against the FSA’s position on provider payments to platforms, cash rebates or unit rebates it is fair to say that I am not expecting to persuade the FSA to change its policy in any of these areas. We will work with the rules as written and try to achieve the best outcome for advisers and their clients.
As I indicated in my brief summary of the consultation outcomes, the one area where I believe we may still see significant development is with “adjacent markets”. What exactly are these?
Generally speaking adjacent markets encompass financial services providers which share some of the characteristics of platforms. The obvious candidates are SIPPs, DFMs, execution-only brokers and insurance companies.
One of the criticisms which has been levelled at the FSA is that the consultation process in relation to platforms has been something of a runaway train. Once the process starts it is both difficult to achieve a safe landing point, and you can end up hitting a couple of targets which you hadn’t intended to when you began.
I believe, now that the FSA has started the train running, it needs to see the journey through.
Our expansion from SIPP administration to offering execution-only stockbroking covering SIPPs, ISAs and General Investment Accounts, provides me the experience to say that there is no reason to exclude either SIPPs or execution-only stockbroking from the scope of this work.
Once you’ve included execution-only stockbroking there is an obvious cross-over to the DFM world. They will also need to be included, particularly with their increasing importance to advisers.
Whilst there isn’t quite the same obvious crossover with insurance companies, their expansion into the platform and SIPP markets means they can’t be excluded if a fair market is to be maintained.
The FSA needs to get adjacent markets right and treat all types of product and service provider which hold retail investment products in a consistent manner. Firms will look to challenge whether they are treated as a platform if this offers an edge in the market. If this element of the consultation results in a fair market, the FSA will have my support on this outcome.
Andy Bell - Chief Executive A J Bell