UK FCA finalises rebate rules

The UK Financial Conduct Authority (FCA) – the new, allegedly improved successor to the FSA – has published the long-awaited “platform paper” setting out new rules on rebates of fund charges from fund managers to investment platforms.

This follows the Retail Distribution Review rules that came into effect at the beginning of the year, which banned financial advisers from receiving ongoing payments made by fund managers (a practice known as trail commission). The FCA will now bring in something similar for investment platforms, which are the intermediaries where the investor or adviser can access funds from many different fund firms in a single place.

These rules will radically alter the way that UK platforms and fund supermarkets charge for their services, since most currently rely on these rebates as some or all of their charges. In future, they will need to charge investors directly for their services.

For more background on how rebates and charges currently work, see this earlier article on RDR and unbundled pricing. Below is a quick summary of the FCA’s new rules and what they may mean for investors.


Unbundled pricing for UK fund supermarkets

The FSA’s Retail Distribution Review (RDR) is set to shake up investment costs in the UK enormously over the next year or so. With effect from January 2013, financial advisers will no longer be able to receive trail commission – ongoing payments from fund groups – on new investments.

More importantly for DIY investors, the FSA is then likely to ban fund platforms for receiving trail commission with effect from January 2014. This means that the fees currently charged by many execution-only firms will have to change drastically.

Once that happens, many of the details in this site’s UK fund supermarket comparison table will change significantly. Unfortunately, exactly what fund supermarket pricing will look like once RDR is complete isn’t clear, making it hard to choose a new provider at the moment.

However, many of the major fund platforms have now announced their “unbundled” charging schemes – unbundled meaning that they must transparently and explicitly charge the investor for their services, rather than getting paid a platform fee in the background out of trail commission. And this is beginning to give us some idea of what fees may look like in a year or so.


Barclays and the spirit of RDR

Citywire is reporting proposals by Barclays to counteract the FSA’s forthcoming Retail Distribution Review ban on funds paying trail commission to intermediaries, by trying to charge the fund providers “administration fees” for having their products on its platform.

Whether the FSA will permit this isn’t clear, but the idea seems to go against the initial spirit of RDR. The FSA’s professed goal is for all the costs to be transparent to the client – they should be paying explicit charges for using the platform, as a flat fee or percentage of their holdings. Not imposing these and instead charging opaque admin fees to providers is not significantly different to the current system of trail commission.

It’s hard to argue that this comes out of the provider’s own margins – that simply means that rather than management fees falling to (say) 0.75% to reflect what the fund firm currently gets, they will just fall to (say) 1% to cover the extra payment that the firm must make to the platform. It will be an implicit share of the fees rather than an explicit one, but the same outcome.