From 6 April 2014 platform services must only be paid for by an explicit charge agreed with the consumer, with some limited exceptions under rules introduced by regulator the Financial Conduct Authority (FCA). This guide explains how those rules work.
In 2012 the rules governing payments to financial advisers changed when parts of the Retail Distribution Review (RDR) came into force. A consumer choosing a product acting on adviser advice could no longer trigger a commission: payment had to be explicit and direct from client to adviser, as outlined in Out-Law's guide to adviser charging.
The new FCA rules will have a similar effect on the platforms that advisers and consumers use to arrange financial services purchases.
Commissions and rebates are banned
Under the rules platform services must be remunerated solely by an explicit platform charge agreed with the consumer and cash rebates from product providers to customers will be prohibited.
The FCA said that it is introducing the changes to improve remuneration transparency and to help consumers compare platform services and decide which offers the best value.
The FCA policy statement on the changes said that they were designed to protect consumers and increase competition in the platforms market. The rules complement the FCA's wider RDR aims of restricting product providers' ability to influence distribution and matching the interests of intermediaries with those of its clients.
Platform charges
Subject to limited exceptions, platform service providers must only be remunerated for the platform service by 'platform charges', which must be paid by clients only. Payments received by platform providers in performance of their business from alternative sources in the distribution chain will not be considered to be "platform charges".
According to the Policy Statement a platform charge is "any form of charge payable by or on behalf of a retail client to a firm in relation to the provision of a platform service and which is agreed between the platform service provider and the retail client".
The guidance lists the following examples of remuneration that should not be accepted by platform service providers:
The new rules reflect the FCA's objective of setting clear pricing for platform services, and products if the platform provider is also the product provider, and agreeing these with the customer up front.
Exceptions
Platforms will be entitled to continue to receive payments from product providers for legacy business until 6 April 2016.
Following industry feedback the FCA has identified specific circumstances in which the platform service provider may accept payments from investment product providers. Such payments are to be permitted in the case of 'legitimate expenses' being incurred by the platform service provider. Such legitimate expenses are limited by the new rules to payments for:
These payments must not vary "inappropriately" according to the provider firm making the payment and must be reasonable and proportionate for the service. The payments or service must not channel business to that particular provider firm other than via the normal effect of "general advertising".
These further restrictions on otherwise exempted payments reflect the FCA's concern about potential abuse of the rules by operators seeking to disguise prohibited payments. In particular the FCA has explained that "advertising" payments should not enable products to appear on shortlists or influence their ranking. The FCA said in the Policy Statement that abuse of these permitted payments could lead to an outright ban on payments between product and platform providers.
Rebates to non-advised consumers
Subject to some limited exceptions, cash rebates to consumers will be prohibited for all platform services from the implementation of these rules.
As part of the RDR process financial regulators prohibited the payment of cash rebates from product providers or platforms to consumers when those consumers were advised by a financial adviser. This was to bring that process in line with the RDR's ban on commission payments from product providers to advisers and was designed to restrict the opportunity for conflicts of interest between consumer and adviser in the selling and promoting of products.
This was then extended to non-advised sales.
Exceptions
One of the exceptions to the rules governing cash rebates is that product providers can pay cash rebates to the platform provider if the rebate is passed on to the customer in full in the form of additional units.
Though this appears to support the objective of removing conflicts of interest in a provider's promotion of certain products it is unclear how this is preferable to full cash rebating in respect of clarifying the overall product price to the consumer. The FCA has said that cash rebating makes calculating the true cost of the platform too complex for consumers, but receiving unit rebates may not make this any easier.
The only other exception to the ban on cash rebates is when that rebate does not offset or appear to offset any adviser charges or platform charges. The FCA gives two examples of when a rebate may fall within this category:
Contact: Bruno Geiringer - 020 7418 7306