FCA urged to extend platform exit fee ban to all investors

‘Many consumers will continue to be held hostage’

The Financial Conduct Authority has been urged to extend its net wider on the exit fee ban proposed in its investment platform market study.

Interactive Investor said the existing proposal limits would continue to see a number of customers held hostage by punitive charges if they wish to shop around. It also said the ban needs to extend beyond platforms to firms offering equivalent services.

The D2C platform was responding to the FCA consultation on the platform market study.

The deadline for feedback, on Friday 14 June, came in the midst of the fallout from the Woodford fund suspension, leaving the FCA looking on the back foot as no issues that have come to the fore during the suspension were addressed in the report.

The exit fee ban was one of the only issues the regulator sought to address in the final report, published in March 2019, alongside rules to make in-specie transfers simpler.

‘Many consumers will continue to be held hostage’

Interactive Investor chief executive Richard Wilson (pictured) said it was unfair the current FCA proposals only apply to new customers.

“The proposal to apply a ban on exit fees only to ‘new business going forward’ means many consumers will continue to be held hostage to existing, uncompetitive services. The only acceptable approach is to apply the ban to new and existing business.”

Wilson said administrative costs associated with account closures or transfers were inconsequential in relative terms. II stopped applying exit fees in late 2017. “We have not implemented any new charges to ‘recover’ this income,” he said.

“If a firm is reliant on exit fees as a material revenue stream, this should be viewed by the regulator as a significant conduct risk that is likely to be contributing to poor customer outcomes and the FCA should apply supervisory scrutiny.”

But AJ Bell, which charges exit fees on Sipp and stock transfers, said there was a significant difference between recouping costs and those in place to penalise a client from changing provider.

Chief executive Andy Bell said: “Firms incur specific costs when transferring clients assets and we believe we should have the ability to recover those costs from the clients involved rather than subsuming them within our general business costs, which would then inevitably be recouped via charges levied on all clients regardless of activity”

Bell has previously said an exit fee ban would not have a material effect on AJ Bell.

Exit fee loopholes

II also called for the FCA to extend its ban to other arrangements that have the same effect as exit fees, such as rebates of upfront fees, whereby a 5% upfront charge is rebated as a 1% bonus over the next five years.

Aegon also raised concerns about potential loopholes in the ban.

“Some platforms do not differentiate between product and platform charges, while others do, so a ban which doesn’t extend to product charges would be challenging to enforce” said pensions director Steven Cameron.

Like II, Aegon does not charge exit fees.

Ahead of the FCA consultation closing, SCM Direct co-founder Gina Miller told Portfolio Adviser she was underwhelmed by the exit fee ban.

Miller said last Thursday: “The FCA incredibly intends not to ban product-based exit fees charged by vertically integrated firms, for example SJP. How can it be remotely fair to either platforms or consumers for the FCA not to ensure a level playing field?”

Complications with in-specie transfers

Aegon and Quilter have both also called for the FCA to rope fund managers into in-specie transfers, whereby a fund share class needs to be changed in order for a transfer between platforms to go ahead.

The existing FCA proposals suggest the ceding platform needs to arrange a conversion into a share class available on the new platform.

But Cameron argues this would require platforms having to add thousands of extra share classes to their offering creating significant initial and ongoing costs. Quilter echoed those sentiments in its submission stating the resulting costs passed on to customers in higher platform fees.

Cameron said: “We are urging the FCA to work with the platform industry and fund managers on a radical new solution under which fund managers would undertake the share class conversion as part of the re-registration of the client’s assets between platforms. This alternative approach could lead to a more streamlined, cost-effective, customer friendly and forward looking solution.”

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