FCA clamps down on ‘double dipping’

The FCA surveyed 42 investment platforms and SIPP provides and found that the majority retain some of the interest earned on their customers’ cash balances, which may not meet the expectations under the Consumer Duty particularly considering the substantial increase in the Bank of England base rate. According to the FCA, in June 2023 alone, the firms surveyed collectively earned GBP743 million in revenue from this practice.

The FCA set out its concerns in a Dear CEO letter dated 12 December 2023. The FCA considered that the interest earned by these firms does not reasonably reflect the cost to firms of managing cash and/or are not properly disclosed or explained to the customer.

The FCA also found most of the firms that retained interest also charged a platform fee on the customer cash that they hold (double dipping). The FCA made clear that it does not consider double dipping to meet the standards under the Consumer Duty and have asked investment platforms and SIPP operators to confirm that they have or will cease double-dipping by close of business on 31 January 2024.

Whilst the letter is directed at the specific practices of investment platforms and SIPP operators, other firms should consider whether any of the principles underlying the FCA’s concerns are relevant to their business practices.

Firms offered several different justifications for why interest is retained. The two most prevalent were that retention of interest on cash was undertaken to cover the costs of managing cash, or to discourage long-term allocations of cash in platform accounts. However, the FCA said that this practice may be causing foreseeable harm as it was:

• unlikely to amount to firms acting in good faith as the high percentages of interest rates are not in line with customers’ reasonable expectations;
• generally not providing fair value to consumers, eg if the reason for retaining interest was to meet operational costs of managing cash; and
• not facilitating consumer understanding and may not meet the information needs of customers or was unlikely to be understood by the intended recipients (the FCA found the information on retention of interest to be both difficult to find and difficult to understand).

The FCA expects firms to review their approach to retention of interest and to take action to address the concerns in the letter. The FCA suggested that:

• Fair Value Assessments should set out how retention of interest (if applicable) relates to the cost of managing cash (what that cost is and how it has evolved in recent years), how it benefits the customer, and any other relevant considerations – the amount retained needs to be “reasonable” in light of the costs of providing a cash management service (if relevant);
• firms should review and update terms and conditions as necessary to ensure that retention of interest provides fair value and its approach is “clearly and accurately reflected in the product documentation and related communications, and likely to be understood by customers”;
• information that customers need in order to make effective and properly informed decisions about their cash balances needs to be easy to locate;
• communications that explain the firm’s policy for retaining interest should be clear, fair and not misleading and likely to be understood by the firm’s retail customers; and
• firms holding large cash balances should consider what communications with customers may be appropriate to discourage customers from holding large cash balances on the platform longer term, eg protection limits provided by the FSCS.

Investment platforms and SIPP operators are required to confirm any changes that they have made or intends to make to comply with the expectation; that they have revisited their Fair Value Assessments (and are prepared to provide the assessment to the FCA on request); and provide information on their terms and conditions by that date and to have made the corresponding changes by close of business on 29 February 2024.

Firms who consider their practices to be compliant with the Consumer Duty and therefore do not intend to make any changes should confirm this to the FCA with supporting evidence demonstrating compliance with the relevant Consumer Duty requirements.

The FCA stated that it will take “appropriate action” where responses and reviews have not been “as thorough” as it would expect and firms are unable to demonstrate they are meeting Consumer Duty expectations.

It should be noted the letter is not relevant to firms’ arrangements with institutional or professional clients, or to ad-hoc arrangements concerning interest, eg with ultra-high net worth customers.