FCA warning on platform cash rates could prompt profit squeeze

JP Morgan analysts warn of threat to profitability

Sheldon Mills
Sheldon Mills


The Financial Conduct Authority has written to investment platforms expressing concern over interest received on cash balances.

The watchdog pointed out that the Bank of England has raised the base rate significantly over the past 18 months, and as of June 2023 the 42 firms it surveyed had collectively earned £74.3m from holding customer cash.

It said this figure “may not reasonably reflect the cost to firms of managing the cash”.  The watchdog also pointed out that many platforms also charge a fee to customers for the cash they hold, a practice it described as “double dipping”.

See also: AJ Bell’s Doran departs for CIO role at Lloyds

Platforms have until 29 February 2024 to address the issue voluntarily, or the watchdog will take action.

“The FCA is concerned these practices may not be providing fair value to customers and may not be understood by consumers or properly disclosed,” the regulator said in a statement.

Sheldon Mills, executive director of consumers and competition, added: “Rising rates mean greater returns on cash.”

“Investment platforms and SIPP operators need now to ensure how much of the interest they retain and, for those who are double dipping, how much they’re charging customers holding cash, results in fair value.

“If they cannot make that case, they need to make changes. If they don’t, we’ll intervene.”

See also: Guardians of the galaxy: What does the future of asset management look like?

In an equity research note, analysts at JP Morgan highlighted the potential squeeze to investment platform earnings that could result.

“Within our coverage, Hargreaves Lansdown and Abrdn’s II retain circa 200bps on customers cash, which we estimate will account for circa 60% and 30% of earnings in 2024, respectively.

“Quilter is also retaining a smaller margin of circa 135bps on clients cash within its platforms, which we estimate accounts for circa 10% of FY24 earnings.

See also: Calastone: Equity flows positive for first time in half a year

“In our opinion this letter, which follows the two letters that the FCA already sent over the past few months put considerable pressure on platforms, and might drive them to retain a smaller proportion of interest margins, which could result in double digit cut to earnings.”