19th November 2024
Investment platforms have ignored warnings from the regulator about the need to improve interest rates on cash balances. How the FCA responds will be critical to the success of Consumer Duty
A little over a year ago, the FCA called out investment platforms for not paying enough interest to customers who keep cash balances in their account. Many platforms were paying little to no interest on cash – in spite of rates having risen from almost zero to over 5%. Rightly, the FCA questioned whether platforms were offering fair value.
After raising the issue with firms in September 2023, several took the hint and increased their interest rates. But many did not. Indeed, according to Fairer Finance data, over a third of the market still pays no interest on cash balances at all. Halifax Share Dealing is one of the larger players to pay nothing – a fact that it justifies in its Ts&Cs by saying that “any interest we keep helps to develop our products and services”. A little disingenuous.
Interest on investment platform cash balances is not the same as interest on bank balances or savings accounts. I actually have very little problem with banks paying poor rates to customers – as long as they are letting them know and making it easy to switch. The market is competitive and switching is generally straightforward.
But when it comes to investment accounts, particularly stocks and shares Isas, it is not so easy to move cash around in search of a better rate. Money in an Isa is protected from tax – and individuals only have a certain amount they can pay in each year. If cash is pulled out of an Isa, then it can’t be put back in again unless the customer hasn’t yet hit their limit for the year.
And while it is possible to transfer from a stocks and shares Isa to a cash Isa – it tends to be a laborious process, and certainly not one that facilitates moving funds back and forth with ease.
It’s perfectly reasonable for customers to want to move their portfolio in and out of cash at different points in the investment cycle – and it seems impossible to justify the decision by many platforms to pay no interest at all on those balances.
What the FCA does next will be an important indicator of how seriously it intends to enforce the principles of Consumer Duty. It has asked firms to act, most have ignored it – and some are now starting to whittle rates back down again.
If there is no follow up – and no repercussions for the dissidents – it sends a message across the sector that the FCA intends to play out Consumer Duty as the Wizard of Oz. Lots of scary noises with no real teeth.
It may be that they’ve changed their mind – and someone has come up with a reasonable justification. If so, they need to put that on the record. But after 18 months of lots of rhetoric, and the use of its soft power to drive incremental change, the FCA needs a show of strength to stop Consumer Duty fizzling out and missing its enormous potential.