Britain's markets watchdog proposed measures to help five types of customers get better value for money in the 500 billion pound ($662.25 billion) investment funds platforms sector, sending shares in leader Hargreaves Lansdown lower.
The Financial Conduct Authority (FCA) said the sector has almost doubled in size since 2013, attracting an extra 2.2 million accounts as customers increasingly rely on platforms to manage their money. Revenue from retail consumers reached 1.3 billion pounds last year, up from 750 million pounds in 2013.
In its interim report from a market study began last year, it proposed a package of measures to target problems found with five types of consumers. The watchdog is not proposing additional costs and charges disclosure rules at this stage as it wants to give new European Union disclosure rules time to work.
The watchdog has given the sector until early 2019 to demonstrate improvements based on Monday's recommendations, otherwise it will consider further measures, including banning exit fees. "We know that competition is working well for many but it is important that the problems we have identified are addressed so that consumers don't lose out," said Christopher Woolard, the FCA's executive director of strategy and competition.
"We have outlined a package of measures today to address the issues we have found, but we also want to see the industry step up, making it easier for consumers to transfer from one platform to another." Shares in Hargreaves Lansdown, the largest platform, fell 3.8 percent in early trading. Quilter, another platform, was down 0.6 percent.
"We view the proposed changes as negative for Hargreaves, as they should lower... revenues from clients that ultimately leave the company," financial research firm Keefe, Bruyette & Woods said in a note to clients. Hargreaves could see increased costs associated with hiring more customer service representatives to facilitate switching between providers, KBW added.
Hargreaves Lansdown Chief Executive Chris Hill said Hargreaves has been at the forefront of making transfers of investments easier and quicker. The interim report looks at five types of consumers: those who want to switch platforms, users of platforms that are not linked to a financial adviser, those who use model portfolios, customers with large cash balances, and "orphan" clients who no long have any relationship with a financial adviser.
About 7 percent of consumers have tried switching platforms but failed to do so, the FCA said. "Many advisers in our sample charge an extra fee for switching on top of their ongoing advice fee, which can cancel out the potential benefit of lower platform fees and act as an additional barrier," the FCA's report said.
Parallel work will include considering a ban on exit fees by looking at the "practical, policy and legal implications of such an approach". It said fees were hard to understand and compare and noted charges on a pot of 5,000 pounds can vary from 20 basis points to 240 basis points, with a potential difference in return over a 5-year period of 650 pounds assuming a 5 percent growth rate.
Risks and expected returns of model or ready-made portfolios with similar risk labels are unclear, the watchdog added. Consumers may also be missing out by holding too much cash, while just over 400,000 orphan clients with over 10 billion pounds in assets on platforms, face higher charges and lower service.
"We estimate that around 10,000 orphan clients are currently paying extra fees amounting to over 1.2 million pounds every year," the FCA said. Bernstein Research said that overall, the interim report is a modest negative for platforms. The FCA will assess industry progress in the five areas singled out before deciding whether it should introduce additional remedies in a final report in early 2019.
"There are a lot of rules and guidelines in place already on costs and charges, but the regulator has made it clear they won't shy away from introducing more if the industry is seen to be falling short," said Richard Clarke, a partner at consultants KPMG.
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