City watchdog challenges DIY investment platforms on fees and transparency
Having initiated The Investment Platforms Market Study in mid-2017 the Financial Conduct Authority (FCA)has proposed a package of measures it believes are necessary to tackle a lack of competition; it is seeking feedback before publishing final conclusions in early 2019.
Britain’s investment platforms hold assets worth half-a-billion pounds – double the sum in 2013 – but face a clampdown to increase competition and remove expensive barriers to switching.
Investors who feel locked in by high fees to switch their DIY investing platform are of particular concern and as a result of its survey – conducted with 800 advised and non-advised customers – FCA may consider banning exit fees; 28% of investors said exit fees were stopping them from moving providers, 29% stated the process was too complex, and 38% said it took too long.
The FCA said that those ‘who may benefit from switching but find it difficult or costly to do [so]’, although one consumer interviewed for the study put it more bluntly, describing exit charges as ‘criminal’.
Unfortunately for consumers, the regulator said the ‘significant’ barriers to switching could ‘limit the pressure on platforms to provide continued value for money’.
‘investment platforms hold assets worth half-a-billion pounds – double the sum in 2013’
The FCA’s report said platforms earn between 0.22% and 0.54% on every pound investors house with them and noted that as investors become more reliant on them to manage their money, increased transparency of charges – and increased competition – was more important than ever
FCA said that while competition is ‘working well for most consumers’, it is concerned about how platforms compete for particular groups of investors.
Customers who want to switch platform, those who use model portfolios or direct-to-consumer platforms, people with large cash balances and ‘orphaned clients’ – those that previously had a financial adviser but no longer do – are all considered to be vulnerable.
‘Switching fees’ – effectively a penalty for leaving a platform – have long troubled DIY investors and the FCA‘s patience appears to have run out on the issue.
Another key concern the watchdog wants addressed is pricing transparency; where some DIY investing platforms are fee based, some percentage based and others a hybrid of the two, like for like comparison has become increasingly difficult.
A further area is the appropriateness of the risk level descriptions used by ‘model portfolio’ providers; it comes hot on the heels of a critical report on the automated investment platforms – robo advisors – that were criticised for not conducting thorough enough ‘fact-finds’ and being light on suitability.
Shares in the UK’s biggest DIY investing platform Hargreaves Lansdown fell briefly on the announcement, but with over a million customers and £86 billion under management the Bristolean behemoth will believe it has negotiated choppier waters in the past. However, over the years Hargreaves, due in no small part has been the most successful platform in negotiating discounts with fund providers and it would be hard to imagine FCA insisting that its discount should be applied universally because that would eliminate completion between platforms.
‘want to see the industry step up, making it easier for consumers to transfer from one platform to another’
FCA identified several areas in which it wants to see industry-lead change.
It pledged to pressure platforms to drive competition between fund management firms, make it easier for investors and advisers to switch platforms, tackle price discrimination between orphaned and existing clients, and require platforms to alert customers who have large cash balances generating them no returns.
The FCA intends to allow the platforms to interpret and accommodate its requirements individually and it will then assess industry progress in these areas over the coming months before deciding whether it should introduce additional remedies; it is seeking feedback on its findings and proposals before publishing its final conclusions.
Christopher Woolard, executive director of strategy and competition at the FCA, said: ‘This is a market that has seen significant growth in the past five years, with more customers than ever deciding to use a platform to manage their money.’
‘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.’
‘We have outlined a package of measures today to address the issues we have found, but we also want to see the industry step up, making it easier for consumers to transfer from one platform to another.’
FCA’s report comes hot on the heels of a survey that predicted the sector is set to experience significant growth in the next five years – ‘DIY Investing platforms set to attract £100bn over the next five years ‘
Some commentators, however, feel that the FCA has not gone far enough:
Anthony Morrow, chief executive of online financial adviser, evestor, told Citywire Money a ban on exit fees was ‘unlikely to bring an end to rip-off fees’ because value-for-money is hard to specify.
‘The FCA found that over a quarter do not know whether they pay platform charges or what they pay, and the majority cannot estimate charges, so how can customers possibly know they’re getting a good deal?’ he said.
Nutmeg chief executive Martin Stead added that in some cases charges were ‘unclear’ and exit fees ‘punitive’.
‘At the moment it’s too difficult to compare the costs you face from different providers – particularly if you want an idea of what you could be paying over the life of your investment,’ he said.
He said it had been ‘disappointing’ that some platforms failed to comply with new European rules and were ‘not going as far as they should to make costs and charges clear and easy for investors to understand’.