Amid concerns that retail investors aren’t being treated fairly, regulators in the U.K. are warning investment firms about skimming much of the added interest generated on investors’ cash holdings for themselves.
Following a compliance review — which revealed that the majority of investment firms are taking advantage of higher interest rates by retaining a large share of the interest earned on clients’ cash holdings, and also “double dipping” by charging fees for holding cash — the regulator issued a warning.
“The FCA is concerned these practices may not be providing fair value to customers and may not be understood by consumers or properly disclosed,” the regulator said.
In a letter to industry CEOs, the FCA reported that it found that 71% of firms retained some of the interest generated on clients’ cash balances. The rate of interest retention varied between 10% and 100%, with the average being 50%.
Practices that include retaining a large share of the interest earned on clients’ accounts are “not in line with customers’ reasonable expectations, and as such are unlikely to amount to firms acting in good faith,” the FCA said.
In the month of June alone, a sample of 42 firms generated £74.3 million in revenue from skimming a share of clients’ interest, it found.
“Firms offered several different justifications for why interest is retained. The two most prevalent were that retention of interest on cash was undertaken to cover the costs of managing cash, or to discourage long-term allocations of cash,” it noted.
Despite these claims, firms are “generally not providing fair value” to clients, the regulator found. It noted that often the interest retention vastly exceeds the operational costs of managing clients’ cash.
Disclosure to clients regarding these practices also varied widely, the FCA said.
“We found that information on this can be both difficult to find and difficult to understand,” it said.
Additionally, the regulator found that 61% of firms are also double-dipping by charging fees for holding clients’ cash and taking a large share of the interest. The regulator said this raised “serious concerns” and indicated that firms are not acting in good faith or dealing fairly and honestly with clients.
In the wake of its review, the FCA ordered firms to review their approach to retaining interest on clients’ cash holdings and their disclosures around these practices.
The FCA warned firms to ensure they are providing investors with fair value on their cash balances.
“If they cannot make that case, they need to make changes. If they don’t, we’ll intervene,” said Sheldon Mills, executive director of consumers and competition at the FCA, in a release.
The regulator also specifically ordered firms to stop the practice of double-dipping.
Firms have until Feb. 29, 2024 to comply.