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FCA considers banning ‘criminal’ platform exit fees

FCA considers banning ‘criminal’ platform exit fees

(Update) The City watchdog is considering banning exit fees on fund supermarkets in a bid to make it easier for investors to switch platforms.

In a year long study into the use of online platforms, the Financial Conduct Authority (FCA) took the views of 800 customers, both advised and non-advised 'DIY' investors.

It found that exit fees were high on the list of reasons that people do not switch investment platforms, with more than a quarter (26%) finding them difficult or quite difficult to understand. Those who found them difficult to understand were one step ahead of the 1% of advised and 10% of non-advised customers who were unaware of a switching charge when they first joined the platform.

Almost one in three investors, 28%, said exit fees were stopping them from moving providers, 29% stated the process was too complex, and 38% said it took too long.

A total of 7% of investors had attempted, and failed, to switch providers.

The FCA said that those ‘who may benefit from switching but find it difficult or costly to do [so]’, although one consumer interviewed for the study put it more bluntly, describing exit charges as ‘criminal’.

Unfortunately for consumers, the regulator said the ‘significant’ barriers to switching could ‘limit the pressure on platforms to provide continued value for money’.

Keeping hold of investors’ money is a profitable business in an sector with £500 billion under administration - a number that has almost doubled in size since 2013.

The FCA’s report said platforms earn between 0.22% and 0.54% on every pound investors house with them and noted that as investors become more reliant on them to manage their money, increased transparency of charges - and increased competition - was more important than ever.

In order to speed up competition in the platform space, the FCA has proposed a ban on exit fees from 2019 if providers don't do better.

Although it acknowledges there ‘may be some legitimate costs associated with transferring consumers’, it called for platforms’ ‘views on the likely impact of this potential remedy on platforms’ business models and alternative ways they may seek to recover any such costs if a ban on exit fees were introduced’.

The paper added: ‘Consumers may also incur product and wrapper exit fees if they switch both platform and their underlying investments. We welcome views on what the scope of any ban on exit fees would need to be to achieve its intended aim of reducing barriers to switching.’

The FCA’s competition director Christopher Woolard said ‘we also want to see the industry step up, making it easier for consumers to transfer from one platform to another’.

Anthony Morrow, chief executive of evestor, an online financial adviser, said a ban on exit fees was ‘unlikely to bring an end to rip-off fees’ because value-for-money is hard to specify.

‘The FCA found that over a quarter do not know whether they pay platform charges or what they pay, and the majority cannot estimate charges, so how can customers possibly know they’re getting a good deal?’ he said.

Nutmeg chief executive Martin Stead said in some cases charges were ‘unclear’ and exit fees ‘punitive’.

‘At the moment it’s too difficult to compare the costs you face from different providers - particularly if you want an idea of what you could be paying over the life of your investment,’ he said.

He said it had been ‘disappointing’ that some platforms failed to comply with new European rules and were ‘not going as far as they should to make costs and charges clear and easy for investors to understand’.

A ban on exit fees may well be beneficial for consumers but it will have a significant impact on platform business models, and the market was already factoring this in as Hargreaves Lansdown (HRGV) shares fell 4%.

Accendo Markets analyst Artjom Hatsaturjants said as the biggest player in the market, the platform will be the ‘biggest target’ for the new rules.

‘The FCA’s latest proposals are far from final, with the regulator itself noting that there could be legitimate costs associated with transferring consumers...Nonetheless, the tone of the FCA’s [paper] appears to be tilted in favour of consumer protection.’

James Hamilton, analyst at Numis Securities, said platforms employ commercial practises ‘which may restrict fund managers’ incentives or ability to offer fund discounts to competitor platforms’ and this could reduce competition between the fund discounts platforms pass to investors.

‘Hargreaves Lansdown has done the best in negotiating discounts for customers and we struggle to see how the FCA could look to get their discounts passed to all providers,’ he said. ‘If that were to happen there would be no competition between platforms.’

Hamilton said in order to encourage competition, charging should ‘move towards utilisation as opposed to an annual fee based on portfolio value’.

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