In March, I wrote an article which looked at whether retaining interest on customers’ cash was compatible with the Consumer Duty requirements.
It was prompted by the publication of Hargreaves Lansdown’s profits, which revealed a significant reliance on cash margins, although I made the point it was not alone in this dependency.
I concluded that all boards and the Consumer Duty champion at all platform and Sipp providers needed to spend some time ensuring they are comfortable their approach to interest on customer cash is in the best interests of the customer and that it is communicated clearly and can be readily understood.
In its first Consumer Duty update after the 31 July deadline, the Financial Conduct Authority cited an early example of how it intends to use the new requirements by setting out a 14-point action plan to ensure banks and building societies are “passing on interest rates to savers appropriately, that they’re communicating with customers much more effectively, and offering them better savings rate deals”.
It would seem very sensible if all platforms and Sipp providers took note of the FCA’s action plan
Given I understand the FCA wrote to investment platforms in July asking how much interest they are making from cash deposits and the extent to which this is passed on to customers, it would seem very sensible if all platforms and Sipp providers took note of the action plan.
Of the six points the regulator lists as its expectation of firms, I would suggest the following are worthy of particular consideration:
- Use their fair value assessments of on-sale savings products to assure themselves and the FCA, where needed, that these represent fair value for customers.
- Take action to prompt their customers in lower paying savings accounts or non-interest bearing accounts to consider alternatives.
- Closely monitor the effectiveness of customer communications, with larger firms providing the FCA with an evaluation by the end of 2023 and any follow up actions they are taking.
- Support consumer financial resilience by encouraging customers to save and/or search for higher rates.
As mentioned, historically most platforms and Sipp providers have generated, in some cases, sizeable revenue streams from retaining interest on customer cash deposits.
This was often justified by a claim the other fees payable were lower than the market average. A few platforms and Sipp providers took an alternative view and passed on all interest to their customers – perhaps charging higher fees on other investments and transactions.
It may now be necessary to proactively signpost customers to accounts where they can obtain higher interest rates
For a customer to establish the true cost and value of the services provided has often been extremely difficult, not least because cash may be held for several different reasons – for example, as a definite strategic investment decision, for short-term transactional reasons or through inertia or ignorance.
What seems absolutely clear, if platforms and Sipp providers are not to fall foul of the new demands of customers avoiding foreseeable harm and achieving the required outcomes, is that all such firms are going to have to take a much more proactive approach to the fair value requirements and also ensure there is total transparency on the approach taken where interest is retained.
That, in turn, will involve collecting market data so fair value can be assessed and benchmarked, and recognising the importance of clear and concise communications with customers. That will also involve collecting the necessary evidence through customer surveys or other means.
This may mean erosion of income for many providers and lead to an increase in other fees
I’ve always held the view it was legitimate for providers to retain interest provided customers were informed exactly what interest they would receive and that it was at least equal to that they could have earned if they had been able to place the cash on deposit in the open market.
But it may now be necessary to proactively signpost customers to accounts where they can obtain higher interest rates. This, in turn, may mean erosion of income for many providers and lead to an increase in other fees. The conflict for providers is obvious but there is no escaping the new Consumer Duty.
John Moret is principal at MoretoSipps and chairman at Investor in Customers
