FSA Mulls ‘Banning Incentives to Investors and Platforms’, but Props Up Consumer Protection

Jack Humphrey, Regulatory journalist
August 01, 2011 /

The Financial Services Authority (FSA) has released new rules on platforms regulation, which extend the elements on consumer protection of the Retail Distribution Review (RDR) into a rapidly developing area of investment services.

The new rules follow a review of the regulation of platforms in the context of the objectives of the RDR that will come into force by 2013, and is expected to push IFAs who offer investment and pensions advice to move under the umbrella of mortgage and consumer protection.

The FSA regulates the financial services industry with four objectives under the Financial Services and Markets Act 2000: maintaining market confidence, securing the appropriate degree of protection for consumers, fighting financial crime, and contributing to the protection and enhancement of the stability of the UK financial system.

These new rules will ensure that consumers receive a better service and will require the market to be more transparent and to operate more efficiently.

Specifically, the key rules that target better service for consumers require platforms and other nominee companies to transfer, within a reasonable time and in an efficient manner, assets held on behalf of customers to another person, when requested; and require platforms and other nominees to pass on fund information to the end investor.

To enable greater transparency and efficiency in the market, the rules also require investment adviser firms using a platform service to take reasonable steps to ensure that they use platforms services that present their retail investment products without bias. These platforms services are used for the purpose of making a personal recommendation, or arranging the purchase of retail investment products for retail clients.

In addition, the rules require platforms to disclose to professional and retail clients any fees or commission they arrange to accept from third parties in relation to retail investment products, which should be done in advance of the platform that provide services to those clients.

Other provisions of the new rules include the extension of the application of the RDR rules on facilitating payment of adviser charges to facilitation through platforms – for instance, if a platform has client cash accounts, it could enable payments of adviser charges out of such accounts – and the requisite for the nominees to respond to information requests by authorized fund managers for liquidity purposes.

In respect of incentives, the FSA mulled banning both cash rebates from product providers to investors and product provider payments to platforms, though it said the changes still have to be studied thoroughly in terms of their impact on business models of platform service providers.

The FSA stated that a further research is needed to ensure that the implications for consumers are fully understood before proposing new rules.

Sheila Nicoll, the FSA’s director of conduct policy, said: “The rules published today are designed to enable consumers to understand the services they are being offered by investment firms, and what they are paying for.

“With more and more business being conducted through platforms, it is important that customers are clear who is charging for what, and for what service. It is also important that customers and their advisers can move their investments quickly and easily, particularly if they are dissatisfied with the service they receive.

“We also believe that it is likely to be in the best interests of consumers that product providers’ payments to platforms and cash rebates from product providers to investors should be banned. But we need to analyse the impact on consumers and on firms’ business models before we propose any new rules.”


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