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Retail investment platforms are currently under investigation by regulators for the profits they make from customers’ cash deposits. This comes as a new consumer duty is set to be introduced, requiring firms to provide investors with “fair value”.
The Financial Conduct Authority (FCA) has sent letters to 39 investment platforms and self-invested personal pension (Sipp) providers, requesting information about the “client interest turn”. This refers to the difference between the interest paid to customers on their cash deposits and the interest earned from investing that cash in money markets.
Regulators emphasize the importance of customers receiving a fair rate of interest on their cash and bank deposits, especially given the current financial constraints many households are facing. The FCA has asked the firms to outline how the past 18 months of rate increases have impacted their balance sheets.
These inquiries are part of a larger effort by the financial watchdog to hold major banks accountable for offering low interest rates on easy-access savings accounts. Last week, the FCA met with representatives from Barclays, Lloyds, HSBC, and NatWest to push for improved rates for clients. Chancellor Jeremy Hunt and Bank of England Governor Andrew Bailey have also added pressure on the City.
Regulators are cracking down in anticipation of the new consumer duty that will be implemented at the end of this month. This duty requires all firms responsible for delivering “retail customer outcomes” to prioritize the interests of customers or face strong enforcement actions.
The FCA has specifically asked investment platforms how they plan to handle retained interest in light of this new duty, and their responses are due by Thursday, July 27. Mike Barrett, a director at consultants Lang Cat, urges the regulator to take action to address the fact that firms can profit from cash spreads but not from funds and bonds. Retained interest on cash represents about 14% of revenue in the sector and up to 33% of annual revenue for some companies, according to Royal Bank of Canada analysts.
Analysts suggest that AJ Bell and Hargreaves Lansdown, the UK’s largest investment platforms, are the most exposed to client interest turn. This year, AJ Bell is projected to generate £66.2 million and Hargreaves Lansdown £245 million from this practice. Hargreaves currently pays 1.36% on balances up to £10,000 in a general account, compared to 1.71% at AJ Bell, 1.51% at Interactive Investor, and 2.75% at Fidelity.
Ben Bathurst, an equity research analyst at RBC, points out that despite the additional income, the share prices of listed platforms have not been affected. This suggests that the market is concerned about potential regulatory scrutiny. Hargreaves Lansdown emphasizes its commitment to protecting clients and offering competitive rates. Interactive Investor’s CEO, Richard Wilson, comments on the importance of building long-term financial resilience and highlights the introduction of tiered rates for larger balances, with rates as high as 3.56% for balances over £100,000. AJ Bell states that its cash facility is not intended for long-term savings, and Fidelity International pays a single rate regardless of balance and does not charge an administration fee on cash held on the platform.
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