The FSA has one chance to get it right on platforms

Ed Dymott, head of UK fund partners at Fidelity, discusses the RDR platform proposals that still need clarifying to achieve a level playing field.

Do you remember what you were doing on the 14 June 2006? John Tiner, the then FSA chief executive, was making his first speech to the industry about introducing the RDR. Four years of significant consultation later, and with just two years to go, we have reached a critical point.

We have only one chance to get it right. If we don’t, the RDR may be long remembered as the industry’s missed opportunity.

I believe the single biggest risk facing the FSA, and the industry, with the implementation of the RDR is the creation of loopholes and exceptions. On a recent trip to India I saw the impact of getting this wrong first hand. The Indian market has been through a similar process to the RDR, part of which included the banning of commissions and rebates. However, the rules were implemented in just the mutual fund market and not in the insurance market. What happened? Indian mutual fund sales have collapsed, and insurance product sales have grown, fuelled by commissions that reach 25%. While the consultation process in India was far shorter than ours, this example still highlights that getting implementation wrong can have significant consequences.

Loopholes and exceptions

With most of the RDR now written into policy, it is platforms that are in the spotlight. The creation of loopholes and exceptions is my biggest concern where this part of the consultation is concerned. At present, several of the outlined proposals have the potential to cause more cost than benefit, and more confusion than clarity. To combat this, the first issue that needs to be resolved is the interpretation of what constitutes a platform. The proposals have currently adopted a narrow understanding of platforms, under which only those known as fund supermarkets or wraps would be included.

Sticking with such a narrow definition would potentially put firms falling within its remit it at a significant disadvantage compared with others that operate in a similar way but escape the definition due to technicalities. For example, fund providers may be allowed to continue charging administration fees within the cost of the products they offer. Life companies could continue to receive rebates and may be required only to disclose limited information, they may also collect administration fees from the cost of their product. Virtual wraps and IFA software companies could continue to escape regulation, continuing to provide services similar to those offered by fund supermarkets or wraps. Finally, non-advised businesses would continue to be out of scope and continue as they do today. With the platform market representing just £111bn of a long-term savings market worth about £2.5trn, 95% of the market could potentially fall out of the scope of the proposals.

No ‘silver bullet’ solution

The next issue to resolve is pricing. I agree entirely with the FSA’s hypothesis on transparency, but disagree with its unbundling solution. There are two crucial points: first, while the FSA is proposing to make platforms switch to an unbundled pricing model, the current platform definition means bundled pricing will be retained by many parts of the market. Second, unbundling has been positioned as the way to achieve price transparency and remove apparent conflicts of interest, but in its current format it may not actually achieve this.

While I see that there are advantages and disadvantages to both bundled and unbundled models, I also feel that neither provides a ‘silver bullet’ solution. Most important, unbundling does not necessarily increase transparency and consumer understanding. In fact, it can have unintended consequences. For example, analysis undertaken by Fidelity clearly shows that, especially for the mass market and mass affluent investors, unbundled pricing structures are significantly more expensive for investors. For example, an ISA customer investing £10,000 would, on average, pay 37bps more if they used an unbundled platform, as opposed to a bundled product.

How else, then, might the FSA approach the issues I have raised? I propose that many of the objectives could be achieved with simplified rules. Regulation to date has always been activities-based. The activities performed by a platform are not materially different from many of the alternative providers mentioned earlier. Based on that, the FSA should look to widen the range of companies falling within the ­regulation to include all services that mediate or intervene between the manager and adviser or client. This would quite clearly be in the adviser’s and investor’s interest. A wider definition would benefit the consumer because it would stop certain business types avoiding regulation due to loopholes, or even changing their business models unscrupulously to avoid regulation: in other words, regulatory arbitrage. The customer almost always loses when this happens. There must be a level playing field.

In addition, instead of unbundling or banning of rebates, a proposal that focuses on improving disclosure could be easier to implement and potentially more successful. One way of doing this would be to introduce a standard, mandatory, ‘Key Information Document’ (a KID) for all platforms and platform-type products. This would allow the easy comparison of charges, as well as disclosure of conflicts of interest, and could include the full breakdown of charges including fund partner rebates. An added benefit would be improved clarity across legacy and new business. The last thing consumers need is further complexity in the savings market. This document, however, could become an important tool which supports an adviser’s engagement with their customer and aids product comparisons. If KIDs were introduced, all product providers and platforms should have to produce one.

Drive for simplicity

The objectives of the RDR are laudable  and, if implemented correctly, can only be positive for the long-term success of the industry. It could improve the reputation and standards of our industry, as well as remove some of the conflicts of interest in the market. Levels of trust could return to erstwhile levels and, as a result, people might save more.

The FSA must ensure RDR costs are controlled, that it drives simplicity and not complexity, and that it improves the environment for investors. The rules should be implemented consistently and should not allow loopholes. We must demand a level playing field and ensure the RDR succeeds. Otherwise, we risk making the 14 June 2006 memorable for all the wrong reasons.