The use of platforms has risen exponentially over the past five years and the adoption of the technology has piqued the interest of the regulator, which has set out some new rules.
The rules have been a long time coming. After years of discussion, consultation papers and to-ing and fro-ing, the Financial Services Authority (FSA) has laid out just what platforms may and may not do and how this will affect Financial Advisors.
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The big news that everyone was waiting for was the final decision on cash rebates. However, few people expected the FSA to backtrack on installing a ban on rebates, which it had previously committed to.
Payments from product providers to platforms as incentives for investing will be outlawed from December 31st 2013 in order to eliminate product bias and provide clarity for consumers, who will know that platforms are not making an extra buck from product providers and asset managers.
This ban on cash rebates will also be extended to those paid to consumers for new business. The regulator argues that allowing cash rebates would be a way for commission — which has been banned — to effectively continue.
Any funds to be paid back to consumers are being delivered in units rather than in cash.
Although it was widely predicted that cash rebates were headed for extinction, it was a surprise that the ban was also extended to execution-only platforms, in an attempt to eliminate market bias.
There was a concern that many consumers believed execution-only platforms were free, because the ‘kickback’ the platform received from the asset manager after a consumer investment was not declared to the consumer.
The FSA has said that platforms must provide advised and non-advised investors with the same level of detail about their investments. Currently, people who invest directly with the platform are provided with full information from fund managers on investments but people who take advice and whose money is invested on the platform via a Financial Advisor are not.
This will ensure that all investors receive the most up-to-date and relevant information.
The FSA has put its foot down on re-registration; which allows money to move from platform to platform without being vested. It has mandated that all platforms must offer in specie re-registration.
Impact on business
In addition to these new rules that the platforms must abide by, the FSA also wants Financial Advisors to look at the impact that platforms have on their business.
It said that advisors must examine the risks their firms and clients would be subject to if they switched platform. Advisors also need to be aware of which platforms are best for the different segments of their client base, and to regularly check that the platforms they use remain suitable.
Although there are still some rules to tidy up, Financial Advisors and platforms can be sure of one resonating message: the client must stay at the heart of the operation.
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