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Investment platform fees are hard to understand, says FCA

Paloma Kubiak
Written By:
Paloma Kubiak

Complex fees make it difficult for consumers to choose an investment platform on the basis of price, the Financial Conduct Authority (FCA) has said.

The city watchdog said fees were “hard to understand and compare” and consumers who want to “don’t always succeed” in finding a cheaper platform.

In its interim report of investment platforms, the FCA said competition was working well for most consumers, but it warned some retail investors found it difficult or costly to switch platforms. Research found 7% of all consumers who tried to switch, failed to do so.

The regulator also took issue with ‘model portfolios’, saying platforms used similar sounding risk labels, such as ‘cautious’, ‘conservative’ and ‘balanced’, which all apply to very different portfolios meaning consumers “may have the wrong idea about the likely risk/returns they face”.

The report also highlighted problems with ‘orphan’ clients – those who were previously advised but no longer have any relationship with a financial adviser – who have limited access to their adviser platform. This means they are “effectively paying for a functionality they cannot use”, according to the FCA.

The city watchdog has proposed a package of measures to improve competition and tackle price discrimination in investment platforms so they’re easier to understand and compare for consumers.

It is considering banning exit fees in order to reduce switching costs and introducing an alert system to warn orphan clients that switching may be more appropriate.

It is also consulting on whether firms should be required to use standard terminology in model portfolios to describe their strategy and asset allocation, and whether third parties should play a greater role in helping consumers shop around and select a platform, such as with price comparison websites.

Investment platforms are a growing market, with £500bn of assets under management, doubling since 2013. During this time, an extra 2.2 million customer accounts have been opened.

Christopher Woolard, executive director of strategy and competition at the FCA said: “This is a market that has seen significant growth in the past five years with more customers than ever deciding to use a platform to manage their money. We know that competition is working well for many but it is important that the problems we have identified are addressed so that consumers don’t lose out.

“We have outlined a package of measures today to address the issues we have found, but we also want to see the industry step up, making it easier for consumers to transfer from one platform to another.”

Martin Stead, chief executive of platform Nutmeg, said: “While costs and charges won’t be the only factor when choosing who to invest with, having a clear idea of how much you can expect to pay over the life of your investment is basic information that should be available to all investors…before they invest. Only by empowering investors, whether they have £100 or £1m to invest, with all the information they need, will people start to feel comfortable investing and in control of their finances.”

Richard Wilson, chief executive of platform Interactive Investor, added: “The ability of investors to switch between providers is an essential part of a fair and competitive industry. There is a risk of significant detriment to customers arising where firms offer tempting incentives for customers to switch, but then tie customers in unfairly with exit fees or minimum holding periods.”