Britain’s financial watchdog plans to ban or cap exit fees charged by investment platforms such as Hargreaves Lansdown and AJ Bell, as part of sweeping changes to the £500bn industry.
The Financial Conduct Authority has been looking into investment platforms that offer a range of funds online and found that 7% of all consumers wanted to switch but were put off from doing so, with many citing exit fees as a significant hurdle. After an interim report published in July, the regulator gave firms until early 2019 to make it easier for customers to transfer their investments to another company.
The watchdog said on Thursday that because firms had failed to do so, it planned to introduce a ban or cap on exit fees as well as new rules to allow consumers to switch platforms and remain in the same fund without having to sell their investments. It is consulting on these measures until 14 June and will announce any steps some time after that.
Christopher Woolard, the executive director of strategy and competition at the FCA, said: “While the market is working well for most of its consumers, the package we’ve announced today should make it less expensive and time-consuming for investors to shop around and move to the platform that best meets their needs. As part of that, we believe it is right that we restrict exit fees, so people can move their money freely.”
The proposed restriction on exit fees would apply to investment platforms as well as firms offering a comparable service to retail clients, including traditional wealth fund managers such as St James’s Place, and financial advisers.
Alistair Wilson, Zurich’s head of retail platform strategy, said: “This is the end of the road for exit fees. The FCA has been flagging its concern for some time and an outright ban is now the most likely outcome. Banning exit fees would remove one of the main barriers restricting consumers from switching platforms.”
The investment platforms market has almost doubled in size to £500bn since 2013 and an extra 2.2m customer accounts were opened over that time. The market is dominated by Hargreaves Lansdown, which charges an exit fee of £25 per fund or stock holding. This means that transferring a multiple-stock or fund portfolio elsewhere can cost hundreds of pounds.
The FCA acknowledged that firms that charge exit fees could respond to restrictions by increasing other platform charges. However, it concluded that because exit fees in 2017 only accounted for 0.2% of firms’ revenue on average, any increase in other charges should be limited.
Hargreaves Lansdown welcomed the proposed measures and that they would apply to the wider market rather than just investment platforms but stressed that any restrictions on exit fees needed to be proportionate. Tom McPhail, its head of retirement policy, said: “Firms will always have to find ways to cover the cost of services they provide.”
McPhail chairs an industry group that is working to speed up transfers of investments so they can be done within hours, rather than days or weeks. At Hargreaves Lansdown, 90% of transfers happen within 17 days and half are done within six days.
Interactive Investor, the online investment platform estimates that it costs just £1 to transfer a stock or fund holding to another platform. The firm has not charged exit fees since December 2017 and permanently scrapped them in November.
Richard Wilson, its chief executive, said: “We wholeheartedly agree with an outright ban on exit fees. Capping them doesn’t solve the issues because it’s a recipe for rip-offs.
“Other firms are charging excessive exit fees. Nearly all consumers are not aware they will be charged to exit at the point when they sign up.”
Gareth Shaw, head of money at consumer group Which?, said: “A ban on costly exit fees that hold investors hostage when they simply want to transfer their funds is entirely welcome and can’t come in soon enough.”
