AJ Bell and Hargreaves Lansdown stand to lose a chunk of their profits following the warning from the Financial Conduct Authority (FCA) over the interest paid on 'idle cash' held in customers' investment accounts, according to US bank Citi.
In a 'dear CEO' letter to the investment platforms, the FCA spelt out its expectations for firms' platform cash revenues under Consumer Duty legislation, Citi noted.
“We believe that the language in the release indicates that firms may need to significantly cut cash margins.”
Citi said that the practice of 'double dipping' on platform fees is not how the major platforms charge, but rather they make their money on net interest income or NII.
“We estimate that c90% of AJ Bell's profits come from NII versus c65% for Hargreaves Lansdown.
Both earn around 200 basis points (bps) margin (2%) on their cash balances, with each 20 bps reduction respectively implying 9% and 7% downside to consensus EPS.
“We expect meaningful consensus EPS cuts" for both AJ Bell and Hargreaves Lansdown, Citi concluded.
Yesterday JP Morgan similarly estimated that said that the FCA scrutiny could see investment platforms look to retain smaller proportions of interest, as AJ Bell has today pledged to do, which “could result in double digit cut to earnings”.