End-investor rebate risks in FOFA bills
The Government's Future of Financial Advice (FOFA) bills, as currently drafted, carry with them the risk that platform providers may cease rebating volume-based benefits to the end investor.
Vanguard Investments has used its submission to the Parliamentary Joint Committee reviewing the FOFA bills to warn that the wording of the bills may give rise to unintended consequences with respect to volume-based benefits.
Pointing to the fact it had urged there should be a requirement to pass any volume-based benefit from product manufacturers to platforms through to end investors, the Vanguard submission said this was consistent with the current practice of some platform operators.
It said even rebates that were considered by platforms and fund managers to reflect reasonable scale efficiencies might influence the product options that an adviser gets access to through platforms, unless the cost benefit was delivered through to the end investor.
However, it said that in the FOFA 2 Bill, the exemptions from the definition of a volume-based shelf-space fee had been broadened from the exposure draft, resulting in there being no requirement to rebate any fee or benefit to the end investor.
"There is a risk that platform providers that currently rebate these payments to investors will cease to do so, as these reforms permit the platform provider to retain the payment," the Vanguard submission warned.
It said the legislation also provided very little guidance on what was a "reasonable fee" or "an amount that may reasonably be attributed to efficiencies gained".
The submission said, on that basis, it was "difficult to see these reforms bringing about any change in market practices, with such wide and undefined exemptions".
It said the Explanatory Memorandum suggested that platform providers should take into account the relative bargaining power between the product manufacturer and the platform operator in determining whether a payment represented the reasonable value for scale efficiencies.
However, it said this suggested that a product manufacturer might be able to continue to exert influence over the products offered to investors through platforms.
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