New FCA platform rules could mean more product sales via platforms

Electronic platforms that charge fees instead of taking provider commission could, from April 2014, sell more products, as investors try to make the most of the charges they have to pay

Platform sales may increase after FCA charging rules

Financial Conduct Authority (FCA) rules relating to the sale of financial products via electronic platforms could mean more products being sold in this way.

The new rules, published by the authority on April 26, essentially finalise what much of the structured products industry knew before: that platforms selling retail financial products from a range of dealers or issuers will no longer be able to make their money via commission from product providers. Instead, they will need to agree and charge the fees directly to investors. This is to crack down on platforms showing one provider's products over another, or showing them in a more preferential way because of the compensation it gets from the provider.

According to industry insiders, one of the possible consequences of the new rules, due to be enforced by the FCA on April 6, 2014, is that the upfront fees chargeable to investors could lead to them buying more financial products on one platform in a bid to make the most out of the fees. Conversely, they may decide to buy structured products in other ways, for example, straight from the distributor.

The FCA is also proceeding with its ban on cash rebates for non-advised platforms, to prevent these payments being used to disguise the costs of the platform charge, although the latest report does detail four instances in which rebates will still be permitted.

The main practical implications of the rule changes will be platforms having to develop a new charging structure, says Nicola Higgs, senior associate at law firm Ashurst in London. "Platforms will need to develop structures that allow them to charge investors fees for use of the platform that are distinguished from the product fees the platform passes on to the provider," says Higgs. "Some platforms will just have a standard subscription fee and some may take a (clearly disclosed) percentage fee for use of the platform whenever the investor subscribes to a new product."

It is possible some investors previously did not know they were paying for platform services, and that is what the FCA is seeking to address, says Higgs. "I would query whether this would result in higher use of platforms, because once an investor's paid one charge they might as well buy all their products from the platform – or lower use of them because they can invest in products on an execution-only basis via other channels without having to pay the platform charge," she adds.

Product providers can still pay platforms in four situations: for work incurred correcting a pricing error by the product provider; work incurred in dealing with a corporate action by product provider; work incurred providing the product provider with management information regarding the consumers who are invested in the product; and payments in relation to advertising products on the platform. The ban on both the advised and non-advised platform market would not prevent investors being able to receive cash rebates that have a value of £1 or less a month, for each fund held on the platform, which the FCA deems ‘unlikely to offset any adviser or platform charges'.

Among platforms to be affected by the new regulation is the Novia platform, which gets rebates from fund managers that are passed on to investors, although they do also offer versions with the upfront fees. It is up to independent financial advisers (IFAs) and their client to decide which they go onto, says Bill Vasilieff, CEO at Novia, in Bath. "We've always said they probably should just get rid of rebates completely, because there's a conflict of interest there. That was always our position, nothing's changed."

While structured products on the Novia platform do not carry rebates, they do sometimes have commission that was paid to advisers, which is then rebated. This practice is caught by the new rules. Structured products do not make up a large proportion of Novia's business – Vasilieff estimates that it is less than 1%. "The trouble with structured products is that most IFAs don't like them; a few do, and they're fans, but a lot don't trust them. There's quite a bit of confusion out there," says Vasilieff.

The SPwrap structured products platform, launched by Lowes Financial Management in conjunction with Meteor Asset Management at the beginning of this year, does not pay platform rebates, and the fees are charged to the investor, rather than through commissions. "It had potential for platform rebates, and I think if you are dealing with a provider and the provider is building the margin to cover that admin and that admin is subsequently done by a platform, it could be conceivable that the platform would be remunerated to do that admin, at the margin that they've put in," says Ian Lowes, co-founder of the platform and managing director at Lowes Financial Management, in Newcastle. "When we designed SPwrap we built in the technology to handle rebates, but we haven't had any or asked for any as yet, and we're probably not going to bother now," says Lowes.