A bitter blow to cheap ISAs

SavingsNew rule changes mean that we could soon be paying more for our Stocks and Shares ISAs.

For years, the Financial Services Authority (FSA) has been trying to figure out how best to improve fairness and transparency in the market for retail investments.
As a result, the FSA has introduced various new rules aimed at helping consumers to buy investments (such as funds and bonds) with confidence.

It put the cat among the pigeons last week by revealing its latest proposals: to ban both payments to 'wrap platforms' from providers and the cash rebates paid to consumers.

That's a wrap
What is a wrap platform?

Quite simply, it's like an umbrella under which an investor can shelter a wide range of financial products in a single account, rather than as separate holdings. It is a platform through which investors can trade direct holdings in shares, investment funds, pensions, some life assurance policies, etc.

Wraps are also known as 'platforms' and 'fund supermarkets.' Wraps can be used by financial advisers or private individuals investing directly. (Fund supermarkets are normally wraps that are aimed at private investors.)

The attractions of wrap platforms are obvious: they cut down on paperwork and red tape, provide a wide choice of products to investors and can improve value for money by providing cash rebates to customers.

Why ban the payments?
While many investors access wrap platforms via financial advisers, an increasingly large group use wraps and fund supermarkets directly through unadvised 'execution-only' deals. With these deals, you tend to pay a single charge, which is then split between the product provider and the platform. However, it's unclear exactly how that charge is split in each instance. This lack of clarity has caused some distrust about whether platforms are pushing certain investments because they get a large slice of the fee.

The FSA wants to improve transparency for both groups, which explains its drive towards separating out charges and banning cash rebates.

In its consultation paper, the FSA stated that cash rebates "hinder transparency and potentially provide a mechanism for commission to continue being paid". It also said this ban "would not prevent rebates being made through additional investment into the product".

What this means to you
Clearly, popular platforms provided by firms such as Hargreaves Lansdown would suffer were these plans to be implemented.

In fact, the FSA estimated that a ban on fund-manager rebates would lose platform providers as much as £10 million a year. In addition, the ongoing costs of platforms could rise by £9.8 million a year. Similarly, fund managers could face extra one-off costs of £3.7 million, plus additional yearly costs of £1.1 million.

The obvious upshot of all this is that wrap providers and fund managers would seek to recoup their increased costs by raising they charges levied on consumers. In effect, wrap platforms will seek to replace their lost income from fund managers through higher fees charged to investors.

What's more, with cash rebates banned, the only available option would be to pay rebates as extra fund units. With investors paying providers and financial advisers in cash but receiving rebates in fund units, this puts an extra squeeze on investors' cash resources.

Then again, the FSA believes that banning platform rebates could lead to greater price competition. With rebates no longer buried 'below the line', wrap platforms might compete more aggressively to win and retain customers, thus trimming fees for all users.

More expensive ISAs
These well-meaning proposals are likely to mean more expensive ISAs and smaller savings pots for you, me and all UK investors.

What do you think? Are these changes necessary? Should we want more transparency, even if it increases costs?

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