Blog: Investors in the driving seat…and not before time

Ian Sayers, Director General, Association of Investment Companies

With the FCA’s long-awaited announcement on how platforms will be paid for, and whether rebates can be paid to consumers, a line has finally been drawn.  Platforms will soon have to be paid for explicitly by the customer rather than the product provider, with rebates to consumers on new business being banned from April next year, and ‘legacy’ rebates ending by 2016.

Though this is great news, I can’t help reflecting on what a long and winding road it has been to get to where we are today.  To someone outside the financial services sector, the whole debate about rebates must have seemed like something from another world, with people arguing so hard about maintaining a system where a customer gives money to a management group, just for the management group to give it straight back to the customer.

In some ways the final death knell for rebates came via the intervention of HM Revenue & Customs, who declared that both cash and unit rebates are taxable as income.  Some might consider them an unlikely hero in all this, but in some ways it’s an inevitable consequence of building such a counter-intuitive system in the first place.

The investment company sector is probably the best case study there is on why transparency alone never resolved the problem of commission bias, and why transparency would not have resolved the problems of allowing product providers to pay for platforms.  With commission also a thing of the past, customers will now see exactly what they are paying for advice, the platform and the fund.  Products like investment companies, which are restricted in paying commission and platform charges, will be able to compete much more on their own merits.

So, in the end, we have got to where we should be.  One of the RDR’s lasting impacts is that customers should now be able to see exactly what they are paying for.  Time and again, research has shown that, when costs are bundled, consumers tend to do poorly.  This is not just because they are unable to shop around for the best price on each element.  It also makes consumers less likely to demand higher standards.  If you perceive something as being ‘free’, you are much less likely to complain about what you are being offered than if you can see how much you are paying for it.

The AIC called for years for the costs of advice, and distribution through platforms, to be unbundled from the cost of the product.  It was a lonely place at times, so it is especially pleasing to see that, finally, customers are finally in the driving seat.  And not before time.