Retail investment platforms are being probed by regulators over the profits generated on customers’ cash, ahead of the introduction of a new consumer duty which will force firms to offer investors “fair value”.
The Financial Conduct Authority on Thursday wrote to 39 investment platforms and self-invested personal pension (Sipp) providers asking for details on “client interest turn” — the difference between the interest they pay customers on their cash deposits and that earned from investing this cash in the money markets.
Regulators said it was “more critical than ever” that customers were paid a fair rate of interest on cash and bank deposits held as part of their investments amid the current squeeze on household finances. They asked the firms to outline how the past 18 months of rate increases had affected their balance sheets.
The questions form part of a wider undertaking by the financial watchdog that has seen major banks hauled in front of officials to justify low interest rates offered on easy-access savings accounts.
The FCA met representatives from the big four banks — Barclays, Lloyds, HSBC and NatWest — last week as it urged them to improve rates paid to clients. Regulators have added to pressure on the City from chancellor Jeremy Hunt and Andrew Bailey, the governor of the Bank of England.
Regulators are clamping down ahead of the introduction of a new consumer duty at the end of this month, which will require all firms responsible for delivering “retail customer outcomes” to have due regard for customers or face “robust action”.
The FCA has asked platforms how they will approach retained interest in light of this new duty and to respond by Thursday July 27.
Mike Barrett, a director at consultants Lang Cat, urged the regulator to act. “If they don’t like the fact that you can retain revenue on cash, they should do something about it.” He said regulators did not allow firms to profit from spreads on funds and bonds, but no such provisions existed for cash held on platforms.
The practice accounts for some 14 per cent of revenue in the sector, rising to 33 per cent of annual revenue for some firms, according to analysts at the Royal Bank of Canada.
AJ Bell and Hargreaves Lansdown, the UK’s largest investment platform, are the two most exposed to “client interest turn”, say analysts. The two firms are forecast to generate £66.2mn and £245mn, respectively, from the practice this year.
Hargreaves pays 1.36 per cent on balances up to £10,000 in a general account. This compared with 1.71 per cent at AJ Bell, 1.51 per cent at Interactive Investor and 2.75 per cent at Fidelity.
“Some of the companies have seen their earnings upgrade quite well on the back of it,” said Ben Bathurst, an equity research analyst at RBC. He said additional income had not affected the share price of listed platforms, suggesting the market was concerned about potential regulatory scrutiny.
Hargreaves Lansdown said: “We ensure that we protect clients, offer a great service and highly competitive rates, [and] actively tell them when they are holding too much cash for too long.”
“Running high levels of cash on investment platforms is at odds with building long-term financial resilience,” said Richard Wilson, chief executive of platform Interactive Investor. He added that his company had introduced tiered rates for larger balances, rising to 3.56 per cent for balances over £100,000.
AJ Bell said its cash facility was not intended for long-term savings, while Fidelity International said it paid a single rate regardless of balance and did not charge an administration fee on cash held on the platform.