Banning fund manager rebates runs the risk of creating "regulatory arbitrage" on a similar scale to that seen in the Indian market, warns Fidelity.
The ban, proposed in the FSA's March discussion paper, has been hotly contested by the fund supermarkets whose intense lobbying is widely believed to be behind delays to the release of feedback on the paper.
Last week the FSA confirmed the release of the paper, originally due in the summer, will be pushed back to the autumn as it conceded there are "lots of issues to be considered".
Fidelity head of UK fund partners Ed Dymott (pictured) says the proposed ban could create a two-tier market between life and pensions providers who will continue to be allowed to receive rebates and platforms where the practice will be outlawed.
The consequent polarisation in the market could mirror the experience of India where a rebate ban was imposed on the mutual fund sector but not the unit-linked insurance market.
Dymott fears the UK platform industry could suffer a similar fate to the Indian mutual market.
"Mutual sales in India suffered significantly after the ban, whereas the unit-linked market continues to grow," he says. "There is a real danger in having a different regulatory approach for different parts of the markets.
"Our issue is different parts of the market will be regulated differently and when that happens you create regulatory arbitrage."
He adds the regulatory changes in India were implemented on a much narrower timeline than the UK.
"The process in India took around three months but we have been discussing the RDR for around four years," he says. "The ban hitting the mutual sector in India had a detrimental effect on the market and demonstrates the immediate impact of a two-tier regulation."
Dymott thinks the UK has much to learn from the experience of India and says the FSA must consider the unintended consequences of a two-tier regulatory approach.
"The ultimate outcome should ensure a level playing field for both platforms and product providers."
The fallout from such "detrimental" regulation could even see platform players migrate to other countries where the industry is less tightly regulated.
"If platforms are domiciled outside the UK they will be out of the scope of regulators," he says.
Dymott adds the rebate issue is complex and the term itself has a loose definition. Rebates paid to platforms, he says, are essentially administration fees whereas those paid to investors are discounts which "have to be good for the market".
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