Rebates have been confirmed as taxable this month, in the long-running clash between Hargreaves Lansdown and HMRC. This effectively confirms ‘superclean’ share classes are the most tax-efficient mechanism for delivering preferential rates on funds, rather than the oxymoronic ‘clean with rebates’.

Asset managers will be very reluctant to implement multiple share classes at varying prices for distribution via different platforms, advisers or DFMs. At least rebates enable an asset manager to trim off a few basis points for a favoured distribution channel without the hassle and cost of registering multiple additional share classes.

Superclean funds also add complexity when transferring assets between platforms in specie, where the availability of share classes differs between platforms. And with little consistency on share class naming, investors have to deal with an enormous array of labels when conducting fund research.

To top it all off, the financial implication of this decision is peanuts for most individuals. Investors would pay marginal tax rates only on a few basis points of rebates on a handful of funds held in unwrapped accounts.

This decision also highlights the regulatory divergence between the UK and Continental Europe, which is still playing out in the cross-border platform market. MiFID II doesn’t ban adviser commission outright, unlike the UK’s RDR; and there is no European equivalent of the FCA’s PS13/1 banning platforms from taking rebates. Platforms and advisers being paid via rebates is still de rigueur on the Continent.

The different perspectives of the UK regulator and tax authority in this case is yet another example of the many variables influencing the evolution of fund distribution. We will be discussing how asset management is at a crossroads and its future role at Platforum ID – the Investment Distribution Conference on 2nd October. Click here for more information.