I never cease to be surprised by how some firms get away with practises which fair-minded people would consider morally bankrupt and intellectually dishonest. I recently discovered yet another ‘scam’ being perpetrated by investment platforms – and the sums involved are flabbergasting.
Say a client has a £30k ISA of which 10% in cash, that amounts to £3k. The difference between getting 2.5% interest and 4.5% interest on that £3kamounts to £60 which is ‘just’ 0.2% of the total invested. It might not sound much, but when I calculated the revenues earned from clients’ cash across three quoted platforms, the sums were astonishing.
Over the last 12 months, the typical revenue margin i.e., the amount of revenue they kept as a proportion of the cash was between 1.7% and 2.0%. The platforms should be able to obtain 4.5%+ on the billions of cash they hold, so paying the clients just 2.8%, means platforms are slicing off over 40% of the interest. Yet millions of clients are already paying these platforms, a generous custody and administration fee, which one might think would cover the platform obtaining the best rates for their cash
I checked my sums with a former platform CEO, and he thought the platforms could get a higher interest rate than my assumptions, given their firepower, so I was being charitable towards them!
I then applied this revenue model to the whole industry and calculated the overall revenue the industry makes from pocketing this cut from the interest earned on clients’ cash. This was just short of £1.3bn which is staggering. I was once told that the perfect crime is where someone takes a small amount from many customers, so no one really notices or cares.
Of course, they are not committing a fraud or other crime, but should they be allowed to continue such practises by the regulator?
It is easy to forget but it is the clients’ money not theirs – why should they be taking a cut? The cumulative sums are so significant that theregulator needs to act now by summoning in the CEOs and saying that they have one of two choices:
1. Stop double charging for client’s interest. This is the clients’ money, and they should be receiving 100% of the interest as they are already paying for custody and admin.
2. Do nothing and lose your regulatory permission.
Each of these platforms is unique in its charging model, and some are better than others. I am aware of at least three investment platforms who pay out 100% of whatever interest they earn – SECCL, SS&C Hubwise and Bestinvest. The worst I found was Barclays which (don’t laugh) has a service called Smart Investor. On the one hand, it’s charges for holding funds a reasonable 0.2% but then it keeps all the interest earned on the cash held by clients within Investments Accounts, Investment ISAs, and SIPPs.
The FCA Consumer Duty clearly states that firms are required to act in accordance with ‘the concept of reasonableness’ and be consistent ‘with the reasonable expectations of customers’ and must check that ‘the interest rate provides fair value in the context of each product.’ How can paying out 0% of the interest clients are earning back to them reasonable?
I was also surprised to discover that Vanguard, normally very pro-consumer, only passes on to clients an interest rate of 2.6% on cash balances. They say it ‘is a managed rate’ and that we ‘make sure that the interest you receive is fair and offers good value. We'll keep any extra interest we receive on your cash above the 2.60% we pay you. This is to cover our costs for managing your cash.’
Vanguard has about £16bn on its platform so were just 5% of its clients assets to be held in cash (half the amount of Hargreaves), the difference between receiving 2.6% and 4.5%, would amount to £15.2m.
Is it really costing Vanguard this much for them to manage UK clients cash?
Surely, it cannot be long before the FCA stops the unscrupulous and unfair practise of taking large cuts from client’s interest?
