Leaving savings languishing in a High Street bank account is asking for trouble, as I regularly remind readers.
There is a strong chance your cash is in a default easy-access account paying a fraction of what you could earn elsewhere.
But stingy banks are not the only risk to savers. Some investment platforms are up to similar tricks — and this has finally got the attention of the financial watchdog.
Yesterday, the Financial Conduct Authority (FCA) warned that platforms are typically retaining a huge 50 per cent of interest earned by customers on their savings for themselves.
These platforms are a popular way to invest cash in Individual Savings Accounts (Isas) or Self Invested Personal Pensions (Sipps) and there are around ten million accounts in the UK.
Helping themselves: The Financial Conduct Authority has warned that investing platforms are typically retaining 50% of interest earned by customers on their savings for themselves
They offer a great way to invest for the future and keep tabs on how your investments are performing.
But the problem lies in how some of these platforms treat their customers’ cash savings.
Frankly, I think some platforms are taking the mickey, by earning healthy interest rates on their customers’ savings and pocketing most of it themselves instead of passing it on.
The fact that the Bank of England base rate has risen 14 times in the past two years seems to have all but eluded them.
Hargreaves Lansdown pays 2.75 per cent on up to £10,000 in a stocks and shares Isa, 3.45 per cent in Sipps or 1.5 per cent in a fund and share account.
Interactive Investor pays 1.75 per cent on the first £10,000 of cash held in an Isa, Junior Isa or trading account and 2.75 per cent on the same amount in a Sipp.
AJ Bell yesterday upped its rates — just hours after the FCA announcement (what a coincidence).
Paying measly interest rates is a lucrative business. Hargreaves Lansdown reaped £269 million from this practice in the year to the end of June.
Yesterday, the FCA wrote to the 42 chief executives of investment platforms and Sipp providers warning that they may not be providing fair value if the amount of interest that they cream off savers ‘significantly exceeds’ the cost of looking after their cash.
The FCA also warned against a second dastardly practice, which it labelled ‘double dipping’.
This is when platforms not only swipe chunks of the interest earned from savers’ money — they also charge them for holding cash. That means platforms profit twice. Outrageous!
The FCA has told firms guilty of double dipping to cease. ‘If they don’t, we’ll intervene,’ said Sheldon Mills, executive director of Consumers and Competition at the FCA.
Firms will need to make any changes by February 29, 2024.
Good. I’m relieved the regulator is finally taking action.
Here’s how not to be a sitting target
In some ways, failing to pass on higher interest rates to savers is even more treacherous when done by investing platforms than by High Street banks.
That is because, if you are getting a low interest rate on your savings account, my advice to you would be to shop around and get a better deal elsewhere.
But this strategy is much less straightforward if you hold some cash on an investing platform.
Many now offer savings platforms that have competitive interest rates. But these rates cannot be accessed within stocks and shares Isas or Sipps. You cannot easily shift your cash from a stocks and shares Isa or Sipp to get a better deal without losing its tax-free shelter.
You could transfer your Isa or Sipp to a different provider, but people tend to choose their investment platform based on many qualities other than how much interest they pay on cash — such as their other fees and reputation for good customer service.
Put simply, pension and Isa savers who hold cash with investment platforms are sitting targets. And since investment platforms themselves seem in no rush to cut off this lucrative revenue stream by paying savers a more competitive rate, the regulator has to step in.
Let’s hope the platforms respond quickly.
