The Financial Conduct Authority (FCA) looks set to get tougher on platforms, including the proposed scrapping of transfer out fees, in a study published today.
The FCA concludes that while the platform market works pretty well there are issues that require addressing, notably:
Switching platforms can be difficult
An understatement! Whilst things are slowly improving, it still often feels like transfers are stuck in the stone ages. We spend hours each week chasing transfers on behalf of clients, without which they would take a lot longer. If current accounts can be switched within 7 days, there’s no reason platform accounts can’t be transferred within a similar timeframe. But it requires all platforms to agree on common (electronic) standards and processes, which they have little incentive to do for fear they could more easily lose customers to rivals. I think the FCA will need to wield its stick on this one.
The FCA suggests that exit fees to leave a platform create a barrier for customers, hence the call to ban them. Let’s hope they follow through on this, as exit fees often feel unfair and can definitely create a disincentive to leave. For example, Hargreaves Lansdown and Tilney Bestinvest both charge £25 per investment transferred out ‘as is’ (called ‘in-specie’). On a portfolio of 20 funds this means a minimum £500 transfer out charge, I’ve always struggled to see how they can possibly justify charges this high.
Shopping around can be difficult
I agree, as many factors such as portfolio size, types of investment held and how often you deal come in to play when comparing cost. The only sensible solution is to build a website tool that makes comparing platforms factoring in such things a breeze…which is why I built www.comparefundplatforms.com a few years ago!
Suggested ‘model’ portfolios with similar risk labels could have quite different risks
A number of platforms aimed directly at consumers offer suggested portfolios of funds, usually labelled along the lines of low, medium and high risk. The FCA says 17% of customers use these, but quite rightly feels that actual risks could vary markedly between two portfolios with the same label. There’s no easy fix for this, unless the FCA is prescriptive for what constitutes differing levels of risk – something I doubt they’ll want to do.
Consumers could be missing out by holding too much cash
Almost all platforms currently pay no interest on cash. And even when interest rates were higher in the past, platforms often used this as a source of profit by paying customers less than the platform received. I’d like to see the FCA compel platforms to pass on whatever interest is earned on customer deposits to customers – it only seems fair.
Orphaned platform customers pay more and/or receive less
This is where someone who previously used an adviser-only platform is no longer advised but remains on the platform. They could face a higher platform fee (e.g. the Novia platform charges an extra 0.50% a year in such cases) and less platform functionality (some features might be for advisers only) versus a consumer-focused platform. The FCA reckons there’s 400,000 such customers and it’s a valid concern. We firmly see it as part of the adviser’s job to leave customers in a good place when parting ways, helping them move platform if necessary (without a new set of advice charges), but we’re clearly the exception. The only practical solution here is for affected platforms to write to such clients making clear they’ll probably be better off transferring elsewhere (and waiving any exit fees).
The FCA seems to be on a roll these days at identifying what could be improved for investment customers. However, let’s hope they follow through with tougher action than they did for the fund management industry, where the initial study was excellent but the subsequent action something of a damp squib.