Investors stung by foreign exchange fees on overseas shares

Some stockbrokers are marking up the cost of foreign currency exchange (FX) on trades by up to 200 times. This amounts to an additional £398 in foreign exchange fees on every £10,000 of shares bought and sold.

This is even though at least four of the biggest brokers – including Barclays Stockbrokers, Charles Stanley, Interactive Investor and TD Direct – are able to exchange currencies within 0.02 per cent of interbank spot prices through deals they have with market makers. However they are still charging investors up to 2 per cent in FX commission each time they buy and sell shares, as well as when they convert dividends.

Hargreaves Lansdown has failed to confirm whether it receives currency rates close to the spot price.

Simon Fenn – head of US and Canadian trading at Winterflood, a market maker for a number of major brokers in the UK, says: "We give brokers exchange rates that are extremely close to the spot price – 2 base points out at the very most. We make our money from these tiny spreads because we deal with very high volumes every day; there are no other fees involved."

FX experts say these brokers can get away with not passing on these cheap wholesale deals to customers because they are the only place British investors can go to buy foreign shares through Individual Savings Accounts (Isas) and Self Invested Personal Pensions (Sipps) – tax wrappers that protect their profits from the taxman.

HM Revenue & Customs rules also prevent investors from escaping inflated FX charges by going elsewhere to get a better rate for their pounds before they purchase overseas shares, because foreign currencies cannot be placed in an Isa or Sipp.

Andrew Woolley, managing director of international payments at FX broker Money Corp, says: "UK brokers have a monopoly over investors using tax wrappers because they are a captive market. International brokers – which are payment services, rather than an investment services – simply don't offer Isas or Sipps."

The volume of foreign shares being held by British investors has spiralled in recent months, largely a result of a surge of foreign companies taking over UK firms. Investors wishing to sell them must pay their broker through the nose for FX, or sacrifice their tax break by moving their shares to an ordinary account elsewhere.

According to Winterflood, the most popular foreign share currently being held by British investors across all brokers is American telecoms provider Verizon (US: VZ) – a share that investors in Vodafone (VOD) were automatically handed when Vodafone disposed of its stake in Verizon earlier this year.

Online broker Interactive Investor says investors on its platform are trading 3 times more foreign shares than they were in 2011.

Hargreaves Lansdown has also more than doubled the volume of foreign shares it held on its platform in 2009. And it says overseas trading in the first quarter of the financial year is up by 50 per cent on the same period last year – mainly because of the Vodafone/Verizon deal in February.

FX fees are just one of a number of costs associated with buying foreign shares, including dealing charges, bid offer spreads, further FX commission on dividends, platform fees, and withholding tax (if investors forget to claim it back).

IC research shows the average dealing fee for foreign shares across online brokers is £18.90 per trade, while the average FX commission is 0.89 per cent. Telephone investors can get the cheapest deal with Interactive Investor – which charges a £10 flat rate for trades, while online investors can get the cheapest trades via Hargreaves Lansdown, where trading starts from £5.95. Charles Stanley is the most expensive as it has a £75 minimum dealing commission, plus a Euroclear charge of £20.

When it comes to FX costs, however, these brokers have some of the highest charges – Interactive Investor charges 1 per cent and Hargreaves charges up to 1.7 per cent. TD Direct is the most expensive, with a 2 per cent FX fee for one-off trades smaller than £25,000.

However, TD Direct does have the widest selection of foreign shares, giving clients access to over 17 markets around the globe. It also offers access to its multi-currency facility – a free of charge service to trade in the currency of the specific market. This means regular investors in foreign shares can buy and sell overseas trades without constantly retranslating their money back to sterling, and incurring multiple FX costs.

When asked why it charges a flat 1 per cent rate for currency exchange, Mike McCudden, head of advanced products, Interactive Investor, said: "We've got a business to run and we have to make a commission somewhere. When we decided how much to charge customers we looked at our competitors and we priced our foreign share dealing competitively relative to the market."

And commenting on why investors with less than £25,000 to invest in an individual company are being made to pay 2 per cent FX fees to trade within an Isa or Sipp, Richard Browning, head of product at TD Direct, says: "We don’t aim to be the cheapest. We think it’s important that we give customers a wide range of markets and shares to choose from."

A spokesperson for Killik says: "We rely on Platform Securities, a Model B Clearer, and the transaction is undertaken by them and they add their charges. This means there are additional steps involved when introducing foreign exchange to a transaction, and these additional charges are levied to cover these."

The Share Centre is one of the only brokers not to charge customers extra for FX when they buy foreign shares. Chris Hutsall, head dealer at the firm, says: "Since there is very little cost attached to exchanging currencies at our end (less than 0.0.2 per cent), we do not see that it is necessary to charge customers any more than this for FX."

"The sheer cost of foreign shares put me off for good" Mr Cox says brokers need a kick up the rear end Like many other experienced and successful stock pickers, 62-year-old Graham Cox from Kent had started to wander off the beaten track of the London Stock Exchange and into foreign territory. The prospect of owning shares in other countries seemed exciting – the potential for returns looked promising. So Mr Cox set to work – and with the help of the IC, he decided he'd like to buy some shares in Awilco Drilling, a small oil company listed on the Oslo stock exchange. Mr Cox has his Sipp with TD Waterhouse and his Isa with Barclays Stockbrokers, so he enquired into both to see which would be cheapest. What he discovered appalled him. Buying £10,000 of shares would mean paying £200 (2 per cent) just for currency exchange. "These brokers need a kick up the rear end," he says. "It is impossible to buy and sell foreign assets without buying the foreign currency – and this is tremendously expensive. I was absolutely set on buying Awilco shares but the broker charges completely put me off buying any foreign shares at all. This is extremely disappointing, but it’s simply too expensive for me to justify."

Comparison of broker fees and services for foreign shares

Source: Investors Chronicle, based on information provided by stockbrokers.

For a more detailed breakdown of broker fees and services

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