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Paul Lewis: Exit fee ban only scratches the surface of murky practices

Platform market would not know what hit it in the real world of competition

I went to the supermarket the other day, as I needed some cheese (I usually do) and tea. I put a rather dull cheddar and a piece of ordinary brie in my basket, but when I looked for the tea I found no loose leaf at all.

I picked up a box of teabags for emergency use when the builders come round, but then thought I would rather go somewhere with better choice and value for money. So, I put down my basket on the side and headed for the exit.

“Excuse me, sir,” said the shop assistant. “That’ll be £25 please. Plus VAT, so £30 altogether.”

“What? Why?” I exclaimed.

“That’s our exit fee,” he said.

FCA seeks platform exit fee ban

“For what?”

“Well, you selected from our range of produce and then decided to get it elsewhere. So, £25. Unless you want to move that cheese and teabags to the other shop. Then it would be £25 for each item as well: £100. Plus VAT, so £125 please.”

“But I didn’t realise…”

“There are signs, Sir. Well, at least one. And when you entered the shop premises we emailed you our business rules. Did you not see them?”

I looked puzzled.

“Tut tut, Sir, always read the T&Cs.”

As I pushed past him, he shouted after me.

“Oh, and they also explain we can keep your car if you don’t pay. Para 94(b)(ii).”

It had already been clamped.Of course, no food retailer could behave like that and stay in business long. But that sort of behaviour is normal in the investment platform business.

I have been excoriated here before for saying that a platform was simply a way to insert a new layer of charges between an investor and their money. But when I read the FCA’s recent Investment Platforms Market Study Final Report, I thought it was time to say it again – adding the word “hidden” before the word “charges”.

I paraphrase, but here is the FCA’s summary of the obscurity of platform charges, which it admits is not complete:

  • Complex charging structures with many fees and charges
  • Words used to describe similar fees differ between platforms making comparison difficult
  • Prices for individual elements spread across different parts of the website
  • Prices not prominent, clear or easy to find

Platforms have even found a way to make cash confusing by using a cash fund, which is not in cash but in surrogates, such as treasury bills and short-term money market instruments.

The cost of managing these ultra-low return investments is then deducted from the tiny increases they show, often leaving nothing or less for the investor.

Paul Lewis: Why HMRC’s latest clampdown goes way too far

These issues are so serious and urgent the FCA has decided it will take firm action: it will look again in 2020 and then decide what to do. Which could include doing nothing…

But there is one area where the FCA actually promises swifter and firmer action. Those exit fees.

First, it wants platforms to scrap the artificial barrier to switching some insist on that makes customers cash in their investment with all the costs and market risks that entails when they move from one platform to another.

Instead, it wants all platforms to use in specie transfers, so the underlying investment remains in the investor’s name and just the platform it is registered with changes.

Second, the FCA wants to scrap the fees charged when an investor moves from the platform they are on to another.

These so-called exit fees can amount to hundreds of pounds – one fee for leaving and another for every investment moved.

FCA holds fire on orphan clients and platform inducement rules

The industry is crying “not fair! What about other firms that charge fees?” The FCA’s response is simple: OK, we’ll impose the same rules on anything similar, including supermarkets. Most importantly, it is warning it does not expect the costs of scrapping exit fees and transfer fees to be passed on to consumers.

Of course, every industry tries to get around fair competition; it is how businesses work. Just look at the pricing of electricity or broadband. But the financial services industry is the master of it.

There are no doubt teams of clever people trying to find ways around these latest small slow steps towards fair competition. After all, if they are implemented people could just leave for a better deal. And obscure, high and complex charges would have to end. Then where would we be?

The key to any market working is competition. And that means I can see what I am getting and what I am paying for it, so I can go to another supplier if it is better or cheaper.

That means prices should be marked clearly on goods or the shelf they sit on. I can then choose the quality I want to pay for and the FSA (yes, the FSA) ensures
the food I buy won’t poison me; the Consumer Rights Act 2015 means it has to be as it is described and fit for purpose; the Consumer Credit Act 1974 means I can get my money back in at least two ways if it is not; and the Advertising Standards Authority polices the way it is marketed. It is a world some financial services would struggle to survive in.

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s Money Box. You can follow him on Twitter @paullewismoney

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Well what a wet analogy, I could have stayed drier in an otters pocket !

    Sometimes Paul, if you brain farts …one, shouldn’t quickly sit up and write it down !

  2. In the end clients pay for everything. The question is which ones should pay for what. The FCA acknowledge there is an actual cost to exiting a client ‘in specie’, it can’t be done without staff and they tend to want to be paid. So, you can either charge the client who wants to move or you can spread the cost among the clients who want to stay. Funny how the likes of FCA and Paul like transparency of costs except when it doesn’t suit them.

    The analogy used is so bad that calling it an analogy is an insult to the word. How about this… I go to a supermarket, fill my basket, go through the till and pay. Before getting to the door I change my mind and demand my money back and leave the supermarket to put everything back where I found it – no charge because it will be included in the price the other customers pay, no problem!

    So, you don’t like hidden charges but you do want the exit fees hidden. You like fair competition but don’t want exit charges subject to it.

    More populist soundbite than sound thinking…

  3. Platforms are pretty much the only way to be able to effectively look after clients’ portfolios. Going back to the old way of holding everything directly would probably increase prices hugely – Paul, have you ever tried to sell and reinvest cash for 100 clients without using a platform? I’ll spare you the details.
    I think that exit charges are wrong, mainly because they bite when a client is moving on, for whatever reason that may be. It is better that the platform/
    adviser/nominee/pension provider is incentivised to retain the client and so should not add a charge when it’s generally too late.
    Perhaps the bigger issue though is the obsession with cost at the expense of value – which no one seems to be able to agree on! Keep on driving down prices and you know what you will get.

    • I think that adviser charges are wrong, mainly because they bite just as the client needs advice, for whatever reason that may be.

      The exit charge simply reflects the cost at the time it is incurred. That’s life. The alternative is to build it into the other costs which is fine but the FCA and Paul should be honest about this and say it’s an exception to their usual requirement for transparency and no cross-subsidy.

      You are right and it’s easy to bleat about cost and ignore value rather than the other way round. Who’d have thought regulators and journalists would take the easy path…

  4. Why did I read that crap?

  5. I ask you Paul …seeing as you are so incensed, around the murky waters the pond life (that is financial services) feed.

    Do you think the FCA gave or give, more that a seconds thought about the costs to the industries clients (this will/may include you, as you will have used an IFA, bank or provider at some point in your life) on its decisions ?

    Every single cost irrespective of how its labelled or dressed up is past on to the end user …you and every other client.

    You are a clever man, and you may choose to believe this or not, but I hate the fact my advice and charges to my clients is so expensive, its gone skyward at a supersonic pace. If I charged my clients a fair and reasonable rate I would be out of business pretty quick.

    Now if you are half as clever as I think you are ? …you will know the exact reasons why.

    Exit fees ….come on Paul ? really !

    The salary bill for the FCA equates to over £101,000 per head, this gives you an idea of the overall budget it demands……and for all this money, rules and directives, how come billions go missing in scams and poor advice yearly

    Exit fees… its like stressing over the pimple on your backside (hidden by pants and trousers) rather than face the reality in the mirror.

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