FCA is cracking down on investment platforms' profits on customer cash
- The FCA has written to 42 CEOs of financial services firms
- She believes that groups involved in double dipping are not acting in 'good faith'
- Shares in AJ Bell and Hargreaves Lansdown both fell on Tuesday morning
The UK financial regulator is cracking down on investment platforms that unfairly profit from customers' cash balances and warned companies against 'double dipping'.
While investor inflows have declined this year due to economic uncertainty, platforms have made a fortune from the interest on customers' uninvested cash deposits.
And some companies even charge customers for holding the money on their behalf, benefitting twice in a practice known as double dipping.
In an open letter to 42 directors of investment platforms and self-invested pension providers, the Financial Conduct Authority has ordered companies to stop charging customers for holding their money.
Command: The FCA has ordered investment platforms to stop double dipping
The company states that double dipping is likely to confuse consumers and believes that groups engaging in the practice are not acting “in good faith” or “in accordance with customers' reasonable expectations.”
The FCA's letter also raised concerns about the way firms handle interest on their customers' account balances.
More than 70 percent of companies surveyed by the regulator admitted to keeping some interest from cash, while the average platform kept 50 percent of accumulated interest.
The groups often argue that withholding interest on cash is necessary to offset the costs of managing the money and to discourage long-term allocations of cash in platform accounts.
But the FCA said firms may not be 'providing fair value to consumers' if the amount of interest retained is 'significantly higher than' the business costs.
AJ Bell and Hargreaves Lansdown recently announced huge revenues and profits thanks to interest on customers' cash, which has grown following the Bank of England's base rate increases.
AJ Bell's pre-tax profits rose by half to a record £87.7m in the year ended September, after turnover rose by a third to £218.2m.
Hargreaves' pre-tax profits also rose 50 per cent last financial year, rising to £403m, as it received £269m from interest on cash in its investment accounts, compared with just £50m in the previous 12 months.
Both companies saw their shares slump on Tuesday morning following the FCA's announcement.
AJ Bell stock diving 8.7 percent to 284.4p and Hargreaves Lansdown Shares fell 6.3 percent to 716.8p.
The FCA wants investment platforms to review their interest holding policies to ensure they comply with recently introduced consumer rights regulations. All affected companies have until February 29 to make the necessary changes.
“Rising rates mean greater returns on cash,” said Sheldon Mills, executive director of consumer and competition at the FCA.
He added: 'Investment platforms and SIPP operators must now ensure how much of the interest they retain and, for those double-dipping, how much they charge to customers holding cash results in fair value.
“If they can't make that case, they need to make changes.”