Cofunds initial thoughts on FSA discussion paper 10/2

Executive summary:
– We support the guiding principles behind RDR and are committed to helping advisers through the transition but there is a danger of stifling innovation with regulation
– We welcome the move towards making pricing clearer for the end customer, but do not agree that banning bundled pricing will achieve this
– We believe advisers are the key to getting the people of Britain engaged with securing their own financial future and we need to support that
Please find our initial thoughts on DP 10/2. We are currently working diligently through the paper and looking into the many points raised, ahead of providing a formal response to the FSA by the 26 May deadline.
Cofunds welcomes DP 10/2 ‘Platforms and believes that it provides a valuable opportunity to help the regulator and advisers shape the nature of the relationship between advisers, clients and investments and the role that platforms play in realising the FSA’s RDR ambitions.
We are pleased that the FSA has acknowledged the pivotal role platforms now play in the run up to and post RDR.
We are also encouraged to see in the DP that the regulator recognises a platform as a service, not a product, and that it changed its descriptor to platform ‘operator’ to distinguish it from product providers. The language may not be perfect but the distinction is very important. However, we still feel that the regulator does not fully appreciate that a platform is, at its core, a technology based administration service that enables advisers to do their job more effectively, whilst helping investors to better understand where their money is and what it’s doing at any given point in time.
A further concern is that the issues raised and the stance taken in this DP do not address the fundamental problem of how, as an industry, we make it easier for consumers to save? How do we ensure that the application of technology in a post-RDR world genuinely helps consumers realise the value of advice and not simply the cost of a fund or product? 
To be clear, our challenge to the FSA’s initial thoughts on platforms does not diminish our wholehearted support of the guiding principles behind RDR and we remain committed to helping advisers transition to the new RDR-compliant environment as painlessly as possible. In fact, Cofunds sees the implementation of the RDR as leading the increasingly pivotal role platforms will have to play in helping the market achieve the goals set out in the consultation paper 09/31, to the benefit of advisers and their clients.
The question of whether the fee that fund managers pay to a platform is commission or not leads to confusion. The fund manager pays a fee to the platform rather than carry out the activities itself. It is a commercial transaction that has no impact on the end investor. If at any time the fund manager believes the fee the platform charges to be excessive, they will refuse to pay it and remove themselves from the platform. The fact that currently most fund managers decide to distribute via platforms suggests that the economics work. More importantly the charge the investor pays remains the same whether they buy from a platform or direct from the fund manager. Since the inception of platforms it has never cost more to buy a fund via a platform.  And, regardless of whether platforms receive a fee from a fund manager or not, it doesn’t influence the end product that the customer gets – unlike adviser commission.
To our mind platforms hold the answer to the transparency the FSA seeks, and we welcome the move towards making pricing clearer for the end customer.  However, experience has taught us that laying bare all the different parts of the transaction does not necessarily make it clearer, but can add another layer of complexity for the consumer. We run the risk of this being detrimental to our overall aim of helping advisers take financial planning to the wider market.
Providing choice is crucial. We believe that a range of solutions should be allowed, disclosed in the same way, so that advisers and their clients can decide. Done properly, this can add clarity rather than detract from it. That way the needs of the whole market are met, not just the very small percentage of investors who currently opt for unbundled pricing, but also the vast majority of the market for whom bundled pricing is deemed most appropriate and for whom the more complex unbundled pricing will almost certainly push up the cost of the type of advice they need. Currently, the majority of advisers and their clients clearly prefer a bundled pricing option. That said, we are committed to adding an unbundled pricing option because we recognise that for some clients this is more suitable, particularly at the very high net worth levels.
The message and the concept need to be kept simple. It is important that at all times we bear in mind who we are trying to help here. The reality is that time and time again advisers have been shown to be the vital link in getting the people of Britain engaged with securing their own financial future. Transparency is clearly desirable provided it doesn’t lead to additional complexity or increased cost, or detract from finding the most suitable option for the client.
We believe that the test of suitability is a perfectly sensible test and one that should be applied to the choice of pricing as well as product and platform. Unbundled pricing is sensible for some investors some of the time, yet for most people a bundled solution is more appropriate. The important point about bundled pricing is that it would cost exactly the same whether you buy directly from the fund group or via a platform.
We firmly believe that only professional advice offers the ability to tailor a lifelong financial plan to an individual’s circumstances and that platforms enable them to do that more easily and more transparently. The measures proposed in this latest discussion paper, particularly around unbundled pricing and platform suitability, run the risk of hindering that process.
We very much look forward to working with the FSA and the Platform Group to: explore and resolve the issues raised in this paper; finalise the Platform Group’s plan to enable the re-registration of assets off platforms; and continue the process of outlining the role of platforms as the key to RDR. We will respond formally to the detail of DP 10/2 in due course.