Stockbrokers that sell shares to the general public are raking in around £1.3 billion a year from paying zero or derisory rates of interest on the cash those investors hold on account.
The top three investment platforms – Hargreaves Lansdown, Abrdn interactive investor and AJ Bell -- made a combined £444 million last year alone from this in what one leading investment manager calls “an absolute scandal”.
Research by the Evening Standard and SCM Direct shows that the brokers income from just holding cash have rocketed as interest rates rose.
These come on top of what the brokers charge to place a share trade, up to £12 a time. Profit margins for the investment platforms are dramatically higher than almost any other industry at 30% sometimes.
Supermarkets and energy giants typically make around 4%.
Hargreaves says: “We tell clients when they are holding too much cash for too long and encourage them to use Active Savings where easy access pays up to 4.71% and we are the only cash savings platform with a cash ISA.”
AJ Bell says it does not reveal how much it makes from cash deposits, but is “looking at providing more disclosure in this area”.
Abrdn has not commented yet.
The figures are revealed just days after banks were lambasted by MPs for not passing on interest rate rises to savers – while ramping up mortgage prices.
Yesterday, the Bank of England held base rates at 5.25%, which means the brokers are probably making at least 4.5% on the cash they hold on behalf of millions of customers.
The top three have 2.7 million customers between them alone.
Assuming the rest of the industry adopts the same practices – which it seems clear they do – they are making around £1.3 billion a year just from low or zero interest payments.
The Financial Conduct Authority has lately put some pressure on the brokers to explain themselves, sending out “Dear CEO” letters to bosses seekinginformation.
Alan Miller of SCM Direct calls the cash deposit profits “an absolute scandal”.
He says: “These platforms were meant to comply with rules called Treating Customers Fairly (TCF) for many years based around the principle that ‘a firm must pay dueregard to the interests of its customers and treat them fairly’. This has now been tightened by the FCA’s Consumer Duty which was part of the reason for St James’s Place recent share price collapse. Will the same fate meet these platforms?”
The FCA letter on 28 September 7 to the brokers said: “Where interest payments are accrued on customers’ cash balances held by firms, this should be carefully considered as part of fair value assessments and to ensure appropriate disclosure, especially in the current economic environment of higher interest rates. Our expectation is that firms deliver fair value to customers and support consumer understanding in line with the requirements of the Consumer Duty.”
However, there is no sign that platforms expect these margins on cash balances to fall.
In May, the AJ Bell CEO said he “anticipated an increase in the average interest rate earned”.
The CEOs of Hargeaves and Abrdn have made similar statements to the City.
A recent survey by Moneyweek 14 revealed that many platforms pay clients less than 2% at present with Barclays paying interest of precisely 0% on cash held in ISAs and SIPPs and between 1.15% and 1.65% elsewhere.
