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The UK’s top financial regulator has vowed to “intervene” if investment and pension platforms continue unfairly to withhold interest payments on their customers’ cash balances or charge excessive fees for managing them.
The Financial Conduct Authority, which launched a probe in July, said the amount of interest these companies had earned from customers’ cash balances had “increased substantially” in the past 18 to 24 months as the Bank of England put up the base rate.
A survey of 42 investment platforms and self-invested pension providers had found the “majority” had retained “some” of the interest earned on these balances and that this practice may be both unfair and miscommunicated, Sheldon Mills, the FCA’s executive director for consumers and competition, wrote in a warning letter to the industry.
He added that the companies in the survey had “collectively earned £74.3mn in revenue from this practice” in June alone.
The regulator also criticised some businesses for “double dipping”, keeping some of the interest margin while also charging clients custody fees, as a potential breach of the new consumer duty rules.
The FCA set a February 29 deadline for companies to ensure their processes were fair. “If they cannot make that case, they need to make changes,” Mills said, adding: “If they don’t, we’ll intervene.”
The FCA had already warned them in October that the practice of keeping some of the interest on client cash might violate the “fair value” obligation under the consumer duty regulations, which came into force earlier this year.
The probe found that almost three-quarters of the 42 companies investigated on average kept half of the interest earned on their clients’ cash. They also found that more than 60 per cent of those groups that retained interest also charged a platform fee.
It also stated that where companies did keep some of the interest margin, “it is not disclosed in a way that facilitates consumer understanding . . . [and] may be causing foreseeable harm to customers”.
The shares of AJ Bell and Hargreaves Lansdown, two of the UK’s largest investment platforms that have reported significant revenue boosts from keeping some of the interest earned on client cash, were hit by the warning, with both falling as much as 10 per cent on Tuesday.
AJ Bell’s shares recovered to trade just over 2 per cent lower in late afternoon trading after it responded to the regulator and announced a reduction in some fees and an increase in the interest rate paid to some customers from April.
“Now we have clarity from the regulator, we are pleased to confirm another significant package of pricing changes which will benefit our customers to the tune of £14mn a year,” said chief executive Michael Summersgill.
Hargreaves Lansdown confirmed it had received the letter but declined to comment further. Its share price recovered to trade just over 6 per cent lower in late afternoon trading.
Robert Johnson is a UK-based business writer specializing in finance and entrepreneurship. With an eye for market trends and a keen interest in the corporate world, he offers readers valuable insights into business developments.
