FSA consults on reforms to platform regulation

FSA consults on reforms to platform regulation

The FSA has published a long-awaited Consultation Paper (CP10/29) seeking industry views on changes to the regulation of platforms.  The reforms seek to ensure that platform services do not undermine the objectives of the FSA's Retail Distribution Review (RDR) (particularly the new rules on adviser charging), and to address other issues identified through thematic and supervisory work.  This e-bulletin summarises the proposed changes.  A more detailed briefing will be published in due course.

This Consultation Paper follows the publication in March 2010 of Discussion Paper 10/2 which mooted the various options for reform (click here for our briefing which discusses the issues).  It was originally anticipated that a consultation paper would follow in the summer, with a policy statement to be published by the end of 2010.  However, publication of the consultation paper and policy statement have been heavily delayed, reportedly due to the high level of industry lobbying.

Definition of platform services

The FSA has proposed a definition of platform services which is hoped will provide greater certainty as to the application of the new rules.  "Platform service" is defined as a service which:

1. involves arranging (ie, arranging deals in investments) and safeguarding and administering assets; and
2. is provided in relation to retail investment products which are offered to retail clients by more than one product provider.

The draft definition captures firms that only offer platform services in relation to investment trusts, exchange-traded funds and other collective investment schemes.  However, the FSA has stated that where traditional packaged products are offered, the new requirements may not be disproportionate.

The FSA has expressly stated that administration services provided by private client investment managers and advisers do not fall within the definition.  As such, the definition excludes services falling within (a) and (b), but which are solely paid for by adviser charges or are ancillary to the activity of managing investments for retail clients.

The proposals regarding re-registration and passing on information and voting rights to underlying investors, are still however relevant to wealth managers and advisers which arrange the custody of clients' assets (see below).  Wealth managers and advisers will also be subject to the rules about the use of platform services where they transact units in a collective investment scheme for a client through a platform rather than direct with the fund manager.

Platform remuneration for advised retail investment sales

The FSA stated in DP 10/2 that it was minded to ban payments from product providers to platform operators in relation to advised retail investment
business, so as to force greater transparency between product charges and platform charges (ie, to ban bundled charging models).  The FSA has now decided not to pursue this course of action.

Instead, the FSA has proposed to continue to allow platform operators to be remunerated by product providers for administration services they receive, subject to an obligation on platform operators to clearly disclose the payments so received.  Further, where platform operators accept fees or commission, they will be obliged to ensure that they are in the best interests of the relevant clients and to ensure that they present retail investment products in an unbiased manner.

The need for advisers and platform operators to comply with the inducements rules set out in COBS 2.3, where non-monetary benefits such as training or investment planning tools are provided, has again been reiterated.

Ban on product charge rebates

The FSA has proposed to prohibit product providers from deferring, discounting or rebating product charges arising from customer investments where this offsets or appears to offset any adviser charges. In particular, the FSA is keen to end the practice of fund managers levying higher management charges and rebating a portion of those charges to the customer, often though their cash accounts at platforms.

The proposed rules would ensure a clear distinction between product charges and adviser charges, being a key objective of the RDR. However, this will undoubtedly have a significant impact on the current remuneration models operated by some platform operators.

Collection of adviser charges

Draft rules are being consulted on which would require platform operators who facilitate the collection of adviser charges to operate to the same regulatory standards as product providers.  For example platform operators will be required to obtain and validate instructions from retail clients.

Use of a single platform by "independent" advisers

The FSA accepts that where an adviser holds itself out as being "independent", it may be able to use a single platform for most of its clients.  Advisers using a single platform will still however be expected to take reasonable steps to ensure that the platform bases its selection of products on a comprehensive, fair and unbiased analysis of the relevant market.  In doing so, advisers will be required to take into account any fees or commission the platform operator receives in relation to those products.

The FSA is also consulting on guidance for advisers on the application of the independence rule when using platform based investments.  The draft guidance helpfully includes examples of good and poor practices.

Compulsory re-registration

It will be compulsory for firms which hold assets on behalf of clients via nominee companies, including platform operators, to allow clients to re-register assets to another nominee company, by no later than 31 December 2012.  This stems from concerns that customers may be currently forced to sell and repurchase their holdings in order to effect a transfer from one platform to another (with associated cost and potential tax liabilities).

Investing in authorised funds through nominees

New rules have been proposed to ensure that investors who access authorised funds through intermediate unit-holders (ie, platform operators or other nominee companies) receive the same information as they would as if they had invested directly.  This extends to requiring intermediate unit-holders to facilitate the exercise of voting rights on behalf of the end investor.  This is said to be consistent with the current draft text of the European Commission's Securities Law Directive.

Also proposed is a requirement for intermediate unit-holders to provide aggregate information when requested by authorised fund managers.

Estimated costs

The predicted costs resulting from the proposals are significant.  The total estimated costs for platform operators and fund managers are £174.6 million, comprising of a one-off cost of £127 million with an additional £47.6 million of ongoing costs.  Platform operators will bear the burden of the new rules with £60.2 million in one-off costs and £25.3 million in ongoing costs.  The substantial costs involved in implementing the proposals may lead to a debate on whether the benefits of the reforms outweigh the costs.