The UK’s Financial Conduct Authority (FCA) has written to investment platforms and SIPP operators, stating worries in how they treat any interest earned on customer cash balances.
The amount of interest some companies earn has increased as interest rates have risen. The FCA recently investigated 42 firms and found that the majority retain some of the interest earned on these cash balances, which may not reasonably reflect the costs of cash management for firms.
Based on responses to an information request and ongoing engagement with firms, the FCA found that:
- The majority (71%) of the 42 firms in the sample retain at least some of the interest they earn on customer cash balances, between 10% and 100%. On average they keep 50% of that.
- Of the platforms that retain interest, 61% also charge a platform fee on the customer cash they hold.
- There is a large degree of variation in the quality of disclosures made to consumers about retention of interest: the FCA found that information about this can be hard to find and difficult to understand.
- The companies offered many different justifications for their reasons for retaining the interest. The two most common were that holding interest on cash was done to cover cash management costs or to discourage long-term allocation of cash to platform accounts.
The FCA expects firms to ensure that maintaining interest on cash balances provides reasonable value and is understood by consumers under the Consumer Duty, in particular the effects of the duty on price and value and consumer understanding.
The high interest rates maintained by some companies are inconsistent with the reasonable expectations of customers and are therefore unlikely to amount to good faith on the part of the companies. Retention of interests by companies generally does not provide reasonable value to consumers (for example, if it greatly exceeds operating costs, where this is provided as a justification for retention).
The FCA also has serious concerns with the practice of some firms both retaining interest and taking an account charge or commission on customers’ cash (‘double dipping’). This practice can be particularly likely to confuse consumers and the FCA does not consider it to demonstrate that a firm is acting in good faith, i.e. dealing honestly, fairly and openly and acting consistently with the reasonable expectations of customers. These concerns about double dipping are in addition to more general concerns about the level of interest retention.
Sheldon Mills, Executive Director of Consumer and Competition at the FCA said:
“Rising interest rates mean higher returns on cash. Investment platforms and SIPP operators must now ensure how much of the interest they keep and, for those double-dipping, how much they charge customers who keep cash, results in fair value. If they can’t do that, they have to make changes.
“If they don’t, we will intervene.”
Companies will have until February 29, 2024 to make any changes.