The Financial Conduct Authority (FCA) is to introduce rules that will make it easier for investors to switch to another investment platform. The regulator has been conducting an investigation into platforms, which include companies such as Hargreaves Lansdown, AJ Bell, Interactive Investor and Fidelity Personal Investing, and says that basic price competition is working well. But the regulator also says that because some platforms penalise investors for moving away from them, it is hampering competition and disincentivising platforms from providing the best service and value for money over the long term.
One way in which platforms try to deter investors from moving to another platform is by charging exit fees when investors withdraw their assets or transfer them to a rival platform. The FCA’s Investment Platforms Market Study, which surveyed 33 platforms, found exit fees made investors less willing to leave platforms. When an investor leaves an investment platform it does incur some costs. But the FCA says platforms are not necessarily disclosing what the exit fees are for and that nearly half of the platforms it surveyed did not clearly state that they charged an exit fee.
The regulator is now consulting on whether to ban exit fees across all financial products where investors deposit assets, including funds, wealth managers and model portfolios.
The FCA says: “We found that exit fees can act as a barrier to consumers switching to a platform that better meets their needs. Exit fees also add to the complexity consumers face when choosing between platforms. We know that firms bear costs for switching consumers but many firms already recover these costs in ways that do not create a barrier to switching.”
However, imposing a ban on exit fees raises a number of issues. If platforms can no longer charge exit fees there is a risk that they will increase fees elsewhere to make up the revenue, so platform investors could end up paying higher prices – even if they do not switch to another platform. The FCA says it may look at ways to mitigate this and will consider capping exit fees rather than banning them.
The FCA also plans to make some changes to the way investors switch platforms. Currently, most investors changing platforms sell their assets, put the proceeds into cash, transfer the cash to another platform and then reinvest it. However, the FCA says that given the cost, effort and possible tax implications of doing this, it will force platforms to find more efficient ways of shifting assets. Over a fifth of investors who wanted to change platforms but didn't said this protracted process and its implications were their main reasons for not moving.
Another reason why platforms make investors transfer their assets out as cash is if they are currently invested in a share class in a fund that is not available on the platform they are thinking of transferring to. But the FCA says if an investor holds a fund share class that is only available on the platform they currently use, the platform must switch the investor to a share class that is offered by the platform they are transferring to before moving them over to the new platform. And if the new platform has cheaper share classes in that fund on offer, it must transfer the assets to the cheapest one.
The FCA says: “We have found that platforms are not facilitating transfers and unit class conversion can create a barrier to switching for consumers. Platforms do not currently have a strong enough incentive to facilitate these transfers and associated conversions.”
The FCA has proposed some other rules, but is not going to implement them yet on the grounds that the platform industry is working to improve the issues that they would address. But it will review what they are doing and if things haven't improved, intervene further next year.
One of its concerns is how platforms invest client assets in listed securities such as shares and investment trusts. The FCA found that in some instances investors could have got their holdings in listed assets for a better price, so will speak to platforms directly to ensure they improve their practices.
The consultation closes in June, and its findings should be published later this year. If you want to provide feedback you can do this here.
