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Evening Standard
Evening Standard
Simon English and Michael Hunter

Crackdown on brokers 'double dipping' customers' cash reserves wipes millions off the sector

THE top City watchdog today warned stockbrokers and pension funds that pay zero or very low interest rates on cash accounts to get their house in order – or face punishing regulation.

That follows an exposé by the Evening Standard in November which revealed that top brokers earn £1.3 billion a year from paying derisory rates of interest on cash accounts – money that small investors are typically holding before they put the money into the stock market.

The top three investment platforms -- Hargreaves Lansdown, Abrdn interactive investor and AJ Bell -- have 2.7 million customers between them and made a combined £444 million last year alone from this according to research by the Standard and SCM Direct.

Today, the Financial Conduct Authority told the firms that they have until the end of February to change their policies.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA said:

"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.”

Shares in the big three crashed – HL was down 8%, Abrdn, 4% and AJ Bell 9%.

That’s a combined £700 million off the value of the shares. None of the firms had an immediate comment. AJ Bell told the Standard last month that while it refused to discuss the issue, it is “looking at providing more disclosure in this area”.

Alan Miller of SCM Direct said: "The FCA has put a firm stop to double dipping, the practice of platforms charging a platform fee and then charging again a cut from interest," he added:

"Let’s hope the FCA will be equally firm on the egregious and excessive cuts from interest.   I believe the platforms will still earn an effective fee of 7 times the amount on client’s interest balances than the non-cash balances.  The FCA must put a firm stop to this daylight robbery."The FCA found that of 42 firms it surveyed, a majority retained some of the interest earned on cash balances, "which may not reasonably reflect the cost to firms of managing the cash," it said.

And since some also charge a fee to customers for the cash being held, the practice is known as "double dipping". 

HL says it does not “double dip” but there is no doubt that a major source of its profits come from paying zero or very low interest on cash accounts. One analyst said it would drop out of the FTSE 100 if it lost the profits it makes from this practice.

When interest rates were very low, few objected to the zero interest rate deals.

Bank of England base rates are now at 5.25%, which means the brokers are probably making at least 4.5% on the cash they hold on behalf of millions of customers.

The FCA first wrote a so-called “Dear CEO” letter to the brokers in September warning them that they expected firms to “deliver fair value to customers”.

The firms tried at the time to dismiss this as merely a request for information rather than a threat.

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