The capacity of collectives to bulk individual accounts and get better returns is what drives “economies of scale”. But who benefits from such bulking is a matter for debate.
The FCA are reported to be looking again at the testy issue of cash returns offered to savers who invest using retail investment platforms.
Holly McKay told the FT of the 12 months to September
it was not “unreasonable to estimate” that the investment platform sector made roughly £690mn over the 12-month period from interest paid by banks on its customers’ cash.
At a time when platforms are finding it hard to attract new investment and harder to make money on existing investment, the margin to be made on client cash can be substantial. Small wonder the FCA are asking questions around the Consumer Duty of platforms to treat customers fairly.
AJ Bell said its “recurring ad valorem revenue” — its interest margin plus a 0.25 per cent custody fee on customer assets — was £75mn in the six months to March 31, up 78 per cent on a year earlier.
For example, an investor who holds £20,000 of uninvested cash in an ISA wrapper on AJ Bell can expect an annualised interest payment of 2.2 per cent (£440), while the platform could earn £1,040 interest on the money at the current rate of 5.2 per cent.
Abrdn reported similar margins for Interactive Investor
a £66mn interest rate margin in the first half of 2023, almost half of the group’s operating profit for the period.
This may sound good business practice and were it not for the consequences to savers , it would be. But savers needed a double digit return over the past 12 months to keep the real value of their money. Frightened away from maintaining money in real assets (or even bonds) by market returns in 2022, the dash to cash in the retail space has given rise to what can best be described as seal clubbing
Seal clubbing is referred to as the practice of hitting the vulnerable when they are least likely to defend themselves. It last appeared on this blog in the days when insurers were taking money in exchange for annuities with no intention of offering the best rate. Then some insurers used inertia to extract maximum profit.
In this case, when they are refugees from “investments” but still on an “investment” platform. Many are little better protected than those who purchased annuities at poor rates. But at least the decision this time need not have a lifetime consequence.
So why are we allowing ourselves to be clubbed?
One argument is that most savers are benchmarking themselves against what they are getting on bank deposits. Currently that can be more than 4% pa less than the rate the bank can borrow money on the market.
But the idea of being on a platform is to get some collective purchasing power and the FCA will be asking whether the collective value of bulking our money using a platform is benefiting the saver as it should. Bad practice of banks should not be the benchmark for platforms.
The Consumer Duty does not cap profits, but it asks those managing others money to be mindful of the interests of the consumer. What the FT is reporting looks like some platforms are being unfair on savers, currently in cash. Let’s hope the Consumer Duty will be applied – and soon.