OpinionJan 23 2014

Platform client cash profits undermine RDR reforms

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An FTAdviser investigation covering 12 platforms revealed yesterday (22 January) that 10 retain interest from cash accounts, equating to an annual revenue total for the providers of as much as £10m or more.

A 13th platform, Transact, has also since confirmed today that it does not retain a penny of interest in cash accounts and that the rate secured from account providers is passed on fully to clients. Just two others - Nucleus and Aviva - do not retain any interest on client cash.

The problem is not just limited to platforms: last year FTAdviser revealed details of retained interest on cash accounts held with self-invested pension providers, which amounts to 40 per cent of total revenue for one firm. A Money Management survey of more than 70 Sipps revealed 55 pay less than the base interest rate, with around 25 paying zero per cent.

Jonathan Gunby, chief development officer at Transact, said that although the platform pays a rate that is variable, it generally does not fall below the Bank of England’s rate. The rate has fallen from around 0.93 per cent last July to 0.59 last month.

Mr Gunby said the issue could even be more complex, as some platforms also apply a cash management administration charge that differs from the annual management charge and is just applied to the cash account.

He said: “Sometimes this can be higher than the interest, so you would end up with a negative figure.

“Certainly in the past, when interest rates were higher, [these charges] would have contributed to [platforms’] profits. We look to be transparent and think the right thing to do is be honest.”

Transact’s platform annual management charge is 0.4 per cent typically and it charges “slightly less” for cash administration.

The regulator is banging on about transparency and has even overhauled the old rebate-based pricing culture as part of the Retail Distribution Review to ensure openness; these charges appear to undermine that imperative.

John Moret, the Sipp industry veteran whose data was used to highlight cash account interest retention in that market, previously told FTAdviser that he does not have an issue with firms retaining a percentage, but that the client should receive a rate of interest no lower than if they approached the bank direct.

Of the 12 platforms who spoke to FTAdviser, seven admitted to paying less than the current record-low 0.5 per cent Bank of England rate. James Hay, for example, pays effectively no interest and admits retaining a percentage. Raymond James and Ascentric also revealed their rates can be as low as zero.

These platforms have nowhere to hide, but what about those retaining interest and paying among the highest rates? Standard Life (at up to 1.65 per cent) and Axa Elevate (currently 0.62 per cent) pay more than Nucleus and Aviva, but the former retain interest while the latter do not.

This argument is specious: the point is advisers and their clients cannot compare costs effectively across platforms due to the range of charging inconsistencies.

Advisers must look at the initial platform fees, if they apply. Then they must take into account the ongoing administration charges and the fund AMCs that have been negotiated.

Beyond that there are plethora of charges that apply in some cases and not in others: transaction fees, switching costs, charges for dealing in paper or over the telephone, exit fees, cash management admin charges, retained client interest. The list goes on and transparency seems a little further away with each step.

New disclosure rules are coming in for both Sipps and platforms, but there continues to be a lack of clarity on what should be disclosed and, of course, there are often smoke and mirrors that can be deployed to obfuscate the issue.

Mr Moret added: “It will be interesting to see what steps the FCA take to monitor whether providers are complying with the spirit of the new rules as well as the principles.

“Essentially the investor needs to get an understanding of what is going on. Advisers should be aware of this and take this into account.”

I couldn’t agree more.