Hargreaves shares fall 10% after FSA rebate ban proposal

Hargreaves Lansdown shares fell sharply in early trading today after the FSA said in yesterday's platform paper it wants to ban payments from fund managers to platforms and cash rebates to consumers.

Shares were down 10.69% to 518p, at around 10.15am, after a note from Citigroup warned the FSA's proposals could mean Hargreaves may need to overhaul its business model.

Analysts at Citigroup said Hargreaves Lansdown's Vantage fund platform receives payments from fund managers and passes some of them on to investors as a "loyalty bonus".

The broker said the change of stance from the FSA, which in an earlier consultation paper said it would allow fund manager rebates, is likely to require a significant changes to Hargreaves' model. 

It said the change of stance from the FSA, which in an earlier consultation paper said it would allow fund manager rebates, is likely to require a significant changes to Hargreaves' model.

Citigroup points out in the first half of 2010, net Vantage Commission revenues accounted for around 35% of Hargreaves' group revenues.

However, it also advised clients to buy the stock on any weakness as the new rules are likely to result in a change in the source of revenue, rather than lost revenue.

Hargreaves Lansdown said: "We have concluded that all changes proposed in the FSA paper required by 31 December 2012 will require little work for Hargreaves Lansdown to implement and will result in no material impact on our business.

"Hargreaves Lansdown already uses a range of proven revenue models. We can apply any of these to the fund market and still provide a competitive, low cost, high quality execution only service. As such we are relaxed about both the short and long term outcomes of any revenue model changes and any additional disclosure.

"Indeed, we see additional opportunity in the potential changes to regulation over revenue streams. We do not believe any changes will materially affect profitability or revenue given our exceptional client base, retention and high service levels."

The FSA said in yesterday's platform paper that it would be including execution-only services, like Hargreaves' Vantage platform, under some of its new rules, particularly those relating to disclosure of deals with third parties like fund managers.

Its paper reads: "...only COBS 6.1E applies to the execution-only services themselves. COBS 6.1E.1R requires the disclosure to a retail or professional client of any fees or commission a platform arranges to accept from a third party.

"The guidance in COBS 6.1E.2G says that if a platform service provider accepts such a fee or commission, it should pay due regard to its obligations under Principles 6 and 7 and the client's best interests rule, and ensure that it presents its retail investment products without bias."

Hargreaves has been criticised in the past for not fully disclosing its financial arrangements with fund managers including in a recent Daily Mail article.