Holding too much cash can mean missing out on returns in rising markets, but it is particularly ill-advised to leave it in broker accounts over long periods. This has been picked up by the UK's financial watchdog, which recently wrote to DIY investment platforms and brokers suggesting they return cash to client bank accounts if it is unlikely to be reinvested any time soon after some reported “significant” increases in cash balances in the first half of 2020.
The Financial Conduct Authority’s (FCA) instruction, which went out to around 600 firms but does not apply to money held in tax-efficient wrappers, comes after investors pulled money from investments amid this year's market volatility, with others adding it to the sidelines so it is ready to invest.
Hargreaves Lansdown’s latest results showed that cash on its platform accounted for £13.6bn of assets under administration at the end of June, up from £10.7bn a year earlier. On this cash, the platform made £91m in interest. Investors Chronicle’s Phil Oakley says that this makes it the business’s most profitable revenue stream, with a profit margin of 0.74 per cent.
The FCA’s letter serves as a reminder that it is not a good idea to have cash sitting in your account for long periods of time. While interest rates remain paltry elsewhere, there are still better options such as a National Savings and Investment easy-access account where investors can earn an annual rate of 1.16 per cent.
Mike Barrett, consulting director at platform consultancy the Lang Cat, says it is an “extraordinarily bad idea” to hold cash on your platform for the long term, not just because the platform will not pass any interest on to you but also because it can be difficult to know where the platform has placed your money. Investors would get a better deal if they went straight to the bank or building society rather than holding cash on the platform.
One of the regulator’s concerns centres on what will happen if your platform, or the institution your platform places your cash with, goes bust - an unlikely but highly disruptive event. Ultimately, up to £85,000 is protected under the Financial Services Compensation Scheme (FSCS), just as if it were with a deposit in a bank. But the insolvency process, should it occur, could leave you waiting months before getting the money back. If you hold your money directly with a bank, FSCS payments are made more quickly.
The FCA is asking platforms to engage with customers to make sure cash is not sitting idle. “If it is in clients’ better interests during this period, we expect firms to return client money balances which are unlikely to be reinvested in the short term,” said Megan Butler, executive director of supervision at the FCA and author of the letter.
But the regulator's suggestion of forcing platforms to pay cash back into client bank accounts has sparked criticism among industry participants for being impractical and unhelpful. Most of the large players, such as Hargreaves Lansdown, AJ Bell and interactive investor, do not charge fees on cash held. Depending on the amount of cash held, the interest you would earn from having cash in the bank may also be negligible.
Richard Wilson, chief executive officer of interactive investor, argues that returning cash could be inappropriate and stray beyond the platform's execution-only remit. “The letter suggests that platforms take proactive steps to return client money balances, i.e. it goes further than simply providing information to customers," he says.
“Non-advised platforms simply don’t have the ability to judge whether a customer was likely or planning to invest their cash in the short term. In fact, they could be just at the point of making an investment and platforms unilaterally returning cash could prevent customers from being able to access the market in a timely manner. Personal responsibility has to come in somewhere. We are our customers’ agent and act on their instructions.”
While fees are not the main driver of the FCA's instruction to platforms, Bella Caridade-Ferreira, chief executive officer at research house Fundscape, says that the letter is the FCA’s way of saying "We know you’re making money on cash and we’re giving you a shot across the bows".
Ms Caridade-Ferreira says this letter is "the first indication of the FCA’s thinking on this subject", adding: "I suspect we’ll see more scrutiny in the short to medium term. Cash is a significant revenue earner for platforms, so this will be a bitter pill for them to swallow.”
The letter comes after a number of platforms reported soaring customer numbers and profits. Hargreaves Lansdown acquired a record 188,000 net new customers in the year to 30 June and its pre-tax profits were up 24 per cent. IG’s profit before tax rose by 52 per cent in the financial year to the end of May, and AJ Bell forecast that profit before tax will increase by more than a fifth for the financial year to 30 September 2020.
