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FCA Must Go Further on Exit Fees

The industry has responded to an FCA consultation on exit fees, and experts say the regulator needs to go further in its final proposals 

Holly Black 17 June, 2019 | 2:26PM

exit

The regulator’s review of exit fees charged by investment firms does not go far enough, experts have said. 

Industry commentators have revealed their response to proposals by the Financial Conduct Authority around a ban on so-called exit fees.

Currently investors using a fund supermarket can be charged hundreds of pounds if they choose to move to a different provider. Firms charge up to £25 to move each holding in an individual’s portfolio. It means those who have a diversified portfolio are penalised if they want to move their money elsewhere.

More than 2.2 million individuals use investment platforms to access funds, equities and other assets, with more than £500 billion invested through these services. But the FCA said it had concerns about the difficulties faced by consumers when they wanted to move their money elsewhere.

The regulator said it should be easier for individuals to shop around between different platforms, adding that customers should be able to transfer their money in-specie (meaning they can move a holding while their money is still invested, rather than having to sell their shares and re-buy once they have moved to a different provider). 

It concluded that exit fees were one of the main barriers preventing consumers from switching and added complexity to platform charges, making it more difficult to compare different providers. 

Steven Levin, chief executive at Old Mutual Wealth, said: “Switching platforms should be simple, straightforward and efficient for customers and the whole industry has a responsibility to deliver that.”

The FCA has been inviting responses to its proposals over recent months; the deadline for feedback was 14 June and it will now consult on its final rules around exit fees. Many respondents think the regulator needs to go further than its current proposals suggest it might.

Interactive Investor said any ban on exit fees should apply to existing customers, rather than just future business. Under the current proposals, consumers will continue to be locked into their existing services, it warns. 

Richard Wilson, chief executive at interactive investor, which removed exit fees in 2018, said: “Exit fees lock customers into services that may not be cost effective or adequately serve their needs. They are a major barrier to a competitive marketplace and an industry-wide ban is the right thing to do.” 

Not all firms charge exit fees but those which do typically say they cover administrative costs associated with closing an account and transferring investments. But Wilson said these costs are “inconsequential” to platforms. 

“If a firm is reliant on exit fees as a material revenue stream, this should be viewed by the regulator as a significant conduct risk that is likely to be contributing to poor customer outcomes and the FCA should apply supervisory scrutiny,” he added, pointing out that the FCA should also widen its definition of exit fees to ensure firms cannot use loopholes through which to still charge customers.

AJ Bell is one of the platforms which still charges exit fees – at a rate of £25 per line of stock, it would cost an investor with 12 holdings in their portfolio £300 to move to a different provider. Other platforms which charge exit fees include Hargreaves Lansdown and Charles Stanley Direct.  

Andy Bell, chief executive at AJ Bell, says: “We believe there is a very considerable difference between fees that are applied to effectively penalise a client wishing to withdraw from a firm’s services and those that are levied purely with the aim of covering the costs involved in administering transfers. 

“Firms incur specific costs when transferring clients’ assets and we believe we should have the ability to recover those costs from the clients rather than subsuming them with our general business costs.” 

But some commentators have pointed out that it is unfair to ban some firms from charging exit fees when the rules will not apply to vertically integrated firms, such as St James’s Place. Others have remarked that, in light of the Woodford Equity Income suspension and subsequent spotlight on fund best buy lists, the regulator has not gone far enough in its review of the industry. 

In March, FCA executive director of strategy and competition Christopher Woolard, said: “The FCA will review progress made by the industry to improve the switching process later this year and again in 2020 if needed. The FCA will consider taking forward further regulatory action if the efficiency of the switching process does not improve.”



 

 

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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