FCA Sets Out Commission-Charging Rules for Buy-Side Platforms

Updated: The recently appointed Financial Conduct authority (FCA) which replaced the Financial Services Authority (FSA) has been having a busy first month. Since inception on April the 1st, the new regulator has already dished out fines and censures and now it makes way for its rulings on commission charges on platforms used in the asset management industry.

The Financial Conduct Authority has published rules to make the way that investors pay for platforms more transparent. In the future, platforms, in both the advised and non-advised market, will not be allowed to be funded by Payments (commonly described as ‘rebates’) from product providers. Instead, a platform service must be paid for by a platform charge which is disclosed to and agreed by the investor.

Currently, providers of investment products, such as investment managers, generally pay a rebate to some platforms in order to have their products included on a platform. This rebate comes from the annual management charge (AMC) which is paid by the investor to the fund manager. As a result, some platforms are able to give the impression that they are offering a free service, which means that the investor may not understand the true cost of the service provided by the platform.

It can be difficult for investors to compare prices and products available on different platforms. There is also a risk that these payments could lead to product bias in the investment market, as products offered by providers who are unwilling or unable to pay a rebate to the platform from their product charges may not have their products available to the investors using that platform.

The FCA is making changes to ensure that investors can make fully informed choices if they wish to use a platform and understand what they are paying for the service the platform provides. These changes include:

• making the cost of the platform service clear to investors by ensuring that the platform service is paid for by a platform charge which is disclosed to and agreed by the investor
• banning cash rebates for non-advised platforms to prevent these payments being used to disguise the costs of the platform charge

Trevor Clein, Compliance Officer at Delta Financial Markets says, "This fits in with the whole ethos and culture change that the FCA are promoting. Transparency is the name of the game and it doesn’t matter whether it is Libor or PPI insurance protection, the FCA want a good deal for the consumer and by doing away with the rebate structure will make a level playing field."

He adds "It will certainly be a cost to users of the platforms. I don’t think this measure will affect the investment industry adversely."

These rules will come into force on 6 April 2014 but platforms will have two years to move existing customers to the new explicit charging model. At the end of the two year transitional period (6 April 2016) platforms will have to charge its customers a platform charge for both new and existing business.

Christopher Woolard, director of policy, risk and research at the FCA, said:"Platforms provide a valuable service but investors are often unclear on what that service costs. These rules ensure that platforms put customers at the heart of their business. Customers will know what they are paying and the service that they can expect. These changes will allow both investors and advisers to compare the costs of investing through different platforms and make an informed decision on whether using a platform represents good value for money.

"We have listened to industry concerns and have introduced rules that are proportionate, recognise how the industry works in practice and the competitive role platforms play in the market. We are encouraged to see signs that the market has already started to move to products which have transparent charging structures that help consumers in anticipation of this change."

Tradency a provider of trading techniques and strategies to retail investors altered its business model last year prior to the regulatory changes, the technology firm used to charge clients a volume based fee however to ensure it stays neutral as a technology service provider the firm amended its pricing structure whereby the broker who offers its platform is charged a per user fee. Lior Nabat, CEO spoke about the change in an interview with Forex Magnates, he said "We believe that the business model needs to be transparent and convenient to both brokers and traders. We also realized that as technology provider we shouldn't charge volume based fees (which essentially made us look like an IB) but rather technology fees and that doing so would allow brokers to focus on client acquisition."