Financial Conduct Authority warnings to investment platforms over customer fairness caused panic on Tuesday.
Following threat of intervention from the regulator today, shares in the likes of Hargreaves Lansdown PLC (LSE:HL.), AJ Bell PLC (LSE:AJB) and Abrdn PLC (LSE:ABDN) slumped as investors feared what a tougher stance on passing through interest rates and keeping customer costs down could look like.
Interest
Indeed, such a good run was enjoyed by the 42 firms scrutinised by the FCA from the interest rates climbing from near zero in late 2021 to 5.25% now, that they generated collective revenues of £74.3 million from their deposits of consumers’ cash in the month of June alone.
What this means is that customers who held cash in their investment portfolios gained nothing from it, while the firms gained interest by depositing the cash themselves.
Of the 42 firms, some kept up to 100% of the interest accrued on consumer balances, according to the FCA, with an average of 50% being pocketed across the board.
Whether it be money placed in an ISA or SIPP, for instance, this is in fact a common practice among investment platforms.
Hargreaves told Proactive that on average, between 8% and 16% of the assets under management it held were kept as cash, with this having sat at 9.8% in June.
The FTSE 100-listed group guides for its interest rate margin to sit between 1.8% and 2.0% meanwhile, with this, Hargreaves acknowledged, having indeed risen with base rates over the past year, before stabilising in the last few months.
According to JP Morgan analysts, Abrdn's Interactive Investor retains a similar 2% margin on interest accrued from consumers' cash, with Quilter PLC (LSE:QLT) keeping less at around 1.35%.
Platform fees
In light of enforcing consumer duty rules - aimed at protecting the best interests of the public - the key point of Tuesday’s warning from the FCA was the fact that over half of the firms quizzed by the regulator said they charge platform fees.
That is, customers are billed for merely using their platforms, alongside often seeing little benefit from higher interest rates for the cash they hold in ISAs and SIPPs.
Hargreaves Lansdown, alongside AJ Bell, was quick to note that it did not ‘double dip’ when approached though - as the FCA described it - adding this practice was indeed the FCA’s key focus.
A tougher stance from the FCA on the practice would unlikely have a material impact on Hargreaves therefore, the spokesperson said, given calls came “for an end to so-called double dipping”.
Though AJ Bell also assured it did not ‘double dip,’ Tuesday’s scrutiny from the FCA was met with sweeping changes to its charges, including cutting fees on trades from £9.95 to £5.00 per transaction from next April.
AJ Bell also said it would lift interest rates for cash held in its pension and ISA accounts.
“Now we have clarity from the regulator, we are pleased to confirm another significant package of pricing changes,” boss Michael Summersgill commented, having assured the plans to lower rates had been in the works for some time.
Ramifications
In the absence of clarification from the FCA over which firms were indeed bordering on unfair practices, with the regulator having declined to comment, Liberum analysts noted it was likely “the outliers in the industry” that were being called out.
Hargreaves and AJ Bell could well be “unscathed” from regulatory scrutiny therefore, according to Liberum, which pointed to the advised market and the likes of Aegon and Aviva PLC (LSE:AV.) as likely more prone to so-called double dipping.
JP Morgan analysts said that such scrutiny could well see investment platforms look to retain smaller proportions of interest though, as AJ Bell has today pledged to do.
This “could result in double digit cut to earnings,” the bank added, given AJ Bell penned a 33% jump in revenue to £218.2 million last year on the back of healthier interest margins, while Hargreaves saw its income climb 26% to £735.1 million.
How the FCA’s clampdown on investment platforms transpires remains to be seen therefore, with little appearing to have been given away as to punishment or changes across the sector as yet.
Investors look to have voted with their feet though, with shares in the Hargreaves and Abrdn both down by over 5% respectively on Tuesday.
Slightly better but also hit were AJ Bell, Quilter and Integrafin Holdings PLC meanwhile, which each fell close to 2.5%.