Today’s announcement that, in the view of Judge Thomas Scott, HMRC have been incorrectly treating fund rebates as taxable could well be one of the most significant changes to platform and asset management land this year. You can read full details of the judgement here.

If you are a fan of platforms you’ll understand and appreciate the differences between rebates and superclean shareclasses, but just in case you actually have a life, here is a quick reminder. Back in the good old days (before RDR), some platform providers received some or even all of their revenue via fund rebates, i.e. payments from the fund group to the platform provider. This was hidden within the fund charge that the client paid, so wasn’t really suited for the transparent world that RDR was introducing. As an example, a client could pay, say, 150bps for a fund, and this would be split roughly three ways between the adviser (trail commission), the platform provider (the rebate), with the fund group trousering the rest.

RDR made advice fees transparent, and it was only a matter of time until regulation caught up with platforms. Rules were introduced to ban platform providers from receiving payments from asset managers, for both new and (after a sunset clause) existing platform business. This meant that any rebate that was paid had to go back to the client in full.

All well and good, but then those nice folk at HMRC decided that for assets held outside of a tax wrapper, these payments should be treated as annual payments for tax purposes, and taxed accordingly. Platforms were forced to deduct basic rate tax at source, and investors were expected to declare any additional higher rate liability on their tax returns. Which I’m sure everyone did.

This rather scuppered several providers’, and the FCA’s plans for the platform market. The FCA have repeatedly stated they see the role of platform providers to include negotiating with fund groups to lower the costs of investing. This makes sense, but when the preferred method of discounting (via a rebate) became taxable for some investors, rebates are suddenly less attractive.

A solution of sorts appeared in the form of ‘Superclean’ shareclasses. Rather than paying the discount to the client via a rebate, these funds have a lower ongoing charge, negotiated on behalf of the client by the provider. However, these come with a couple of big downsides. Firstly, it’s another shareclass for asset managers and providers to administer, and this in turn creates complexity for advisers and clients alike as they are forced to wade through multiple versions of the same fund. And secondly, it creates a barrier to exit. If you want to move away from one provider and you are invested in a superclean shareclass it can be difficult if not impossible to move these assets without incurring cost and/or time out of the market. And as our friends at Altus have recently observed, this is an issue the industry is still struggling to resolve.

So, on the face of it this announcement suddenly makes rebates more attractive, and this is good news for all market participants. For the fund groups, rebates mean fewer shareclasses to launch/administer, and the level of discount can be more easily flexed as required for different distributors. Platform providers also have a reduced number of shareclasses to administer, thereby reducing the complexity of their offerings and operations. Advisers will breathe a sigh of relief with a common shareclass being used across all platforms. And most importantly, from the client’s perspective, they are able to benefit from a lower cost of investing with no barriers to exit, or tax liability.

This won’t be an overnight change. For starters HMRC are entitled to appeal the ruling. Even if they don’t, some platform providers are unable to process rebates so will be stuck using superclean discounts until the required functionality is built. It will, however, be interesting to see how platforms and asset managers react to this ruling, especially with the current FCA expectation for platforms to use their scale to reduce investment costs. This ruling makes it easier to do exactly that, and in a manner that gives the best outcome for clients. Hargreaves Lansdown should be applauded for launching, and as it stands, winning this challenge.