The UK financial watchdog has indicated it is considering banning investment platforms from charging clients exit fees after raising competition concerns.
In the first stage of its review of the investment platforms market, published on Monday, the Financial Conduct Authority said it was worried about the difficulty customers encounter in switching between platforms and shopping around for lower-cost alternatives.
The FCA proposed measures to improve competition, including banning exit fees to leave platforms and publishing data on transfer times.
“We know that competition is working well for many but it is important that the problems we have identified are addressed so that consumers don’t lose out,” said Christopher Woolard, executive director of strategy and competition at the FCA.
FCA lists concerns in investment platform market
The regulator voiced concerns about the lack of transparency on charges and that some platforms are failing to clearly outline the difference in risks and performance of similar model portfolios.
It said the high cost, complexity and length of time involved in switching may mean existing investments are left on more expensive platforms.
Consumers may also be missing out by holding too much cash in their investment accounts, the FCA study found.
“Consumers with large cash balances on D2C platforms may not know they are missing out on investment returns, the interest they lose or the charges they pay by holding cash in this way,” the FCA explained.
Between 2013 and 2017 about 2.2mln more retail customer accounts were opened on investment platforms. Revenue from retail customers was £1.37bn in 2017, compared to £750mln in 2013.
“Around half of the largest online investment platforms charge exit fees, so Hargreaves Lansdown is far from the only company affected,” said Artjom Hatsaturjants, research analyst at Accendo Markets.
“Being the largest, though, means it is the biggest target for potential new rules, and thus hurting the most on the FTSE 100 this morning.”
Investment platforms respond to FCA report
Hargraves Lansdown chief executive Chris Hill said he looked forward to working with the FCA and contributing further to its study.
Hill said Hargreaves Lansdown has been at the forefront of making transfers of investments and pensions between providers “easier and quicker”.
“We welcome the FCA's focus on switching between providers and hope this accelerates the adoption of technology across the industry enabling people to switch more easily,” he said.
Andy Bell, chief executive at AJ Bell, said he believes the FCA has taken the “right approach because even small differences in the price customers pay can have a huge impact over the long-term”.
He said the company addressed the issue of complexity and charges some time ago by having an online calculator on the AJ Bell Youinvest website.
Interactive Investor chief executive, Richard Wilson, also welcomed the FCA’s report and said the firm would work with the watchdog " for the benefit of all retail investors."
“One of the biggest issues is in the industry is lack of transparency in pricing,” he said.
“All the research says that basis points pricing is confusing and investors find pounds and pence easier to understand. Our pricing is a flat fee in pounds and pence. Plus, we have the lowest exit charges in the industry.”
He added: “We are confident that our fair, simple and transparent fees represent continuing good value for our customers.”
Numis points to risks of FCA measures
Numis said like-for-like price comparison is “very difficult” and there is a risk that the FCA opts for one or more standardised costs for model portfolios in a similar manner to the annual percentage rate (APR) calculation for loans.
The broker believes Hargreaves Lansdown has done the best in negotiating discounts for customers and struggles to see how the FCA could look to get their discounts passed to all providers.
“If that were to happen there would be no competition between platforms,” the broker said.
“We believe charging is and should continue to move towards utilisation as opposed to an annual fee based on portfolio value regardless of the effort provided by the adviser.”