Judging by the number of texts and emails I have had over recent weeks it would seem my call for the return of cash rebates has created a bit of a stir.
Let me start by saying that almost all of the people who contacted me shared my view. (Click here to read the article in full.)
Others have already argued the opposite view, that the FCA must not bring back cash rebates.
It is worth a short explanation of the logic behind why I think cash rebates should be brought back.
I think it is undisputed that fund charges are an area currently in the spotlight. Many are questioning the value, transparency and level of understanding at customer level.
The Financial Conduct Authority (FCA) has been upfront about its concerns, and has questioned whether platforms are able and willing to negotiate a competitive price on investment charges.
The position today is simple – some platforms do not see it as their job to negotiate investment charges.
Some, like AJ Bell, would be happy to, but it has not been easy. Fund groups are interested in whether you are able to genuinely drive fund flows. If you manufacture your own funds or offer guided type investment solutions then you are in with a shout of improved terms. If you do not then save your breath and chill out. No matter how big you are, you will not get better terms.
This may change; there is no doubt fund groups are feeling the heat of increased regulatory pressure. The FCA’s asset management study will lead to greater independence in governance structures and an expectation that economies of scale will not all fall as a benefit to the fund groups.
This could play out in favour of the customer, so let’s ask ourselves the question: how would any economy of scale actually be passed back to the end customer?
One of the responses I received – suggested my call for cash rebates would take us back to the dark ages.
Now, I like to think I am forward-thinking by nature, and I happen to be employed by a man who is well known for enthusiastically advancing new ideas.
Let me assure you that neither of us has any interest in watching our industry take a backward step.
As I said to the gentleman in question, the problem with cash rebates was not that they involved cash or a rebate, but that they were agreed under the cover of darkness and kept by the platform!
So let’s avoid this and say that any cash rebate must be fully transparent and 100% negotiated for the benefit of the customer.
To be clear, I think the ban on rebates being retained by platforms – and the resulting unbundling of charges so everyone could see how much is being paid for the fund, the platform and financial advice – was a good move.
I would question whether it was right to impose a blanket ban. Would a customer really have a problem with a negotiated cash sum that is disclosed and paid entirely to them in cash? I sense checked this with my 16 year old son; he both understood the concept and was cool with the idea.
I mentioned transparency. For customers to understand the value they are getting, they must be able to understand the benefit they are receiving. The irony here is that rebates are still allowed but only if they are paid in full to customers in the form of units in the fund they are invested in. Find me a customer that can explain unit rebates properly to you, and I will give you a cash rebate of your own! (My 16 year old son is now excluded from that offer.)
Someone receiving a cash sum into their account in the form of a fund discount will find it easy to understand and significantly more transparent than the unit rebates that are permitted today.
My next test of any potential solution would be that it must create an environment that increases the likelihood of platforms negotiating discounts with fund groups on behalf of customers. A quick chat with a few of the guys from the fund groups will show that they do not want the administrative hassle of multiple share classes, and they would be all for a solution that helps cross platform transfers and mobility. Cash rebates?
Taking the transferability issue on a step; one of the most unfortunate unintended consequences of the retail distribution review was that we have ended up with multiple retail share classes of the same funds. This is confusing for everyone, most notably consumers, and causes problems when transferring assets between platforms.
We have old share classes, clean share classes, super clean share classes, some which pay unit rebates and some which do not. There is no doubt that some investors will be buying the wrong share class. Any solution that is going to improve the value delivered to consumers without increasingly complexity must eradicate multiple share classes for investors and ease transferability.
It was pointed out to me the FCA was recently quoted making it clear cash rebates are not something it envisages coming out of the platform market study.
It went on to say the focus really is on how value is being driven in this market. If that is the case then I refer back to my earlier points.
But I have not yet seen a raft of alternative suggestions that achieve these aims on behalf of the customer. My simple brain returns to the fact cash rebates meet the requirements I have highlighted. They would result in a single retail share class for each fund, with platforms able to negotiate discounts for their customers as long as they are only paid in cash directly into the customer’s account. What is more, they would not present any issues on transferability.
Anyone with an alternative that ticks all of these boxes should speak up. Inevitably some will disagree with cash rebates and that’s fine, but I doubt the conclusion of the platform market review is going to be to do nothing so what are the alternative solutions we need to be exploring?
Billy Mackay is marketing director at AJ Bell.