The regulator is looking at platforms and so should you

The FCA found that most consumers were content with their platform and did not want to switch. But it also said that barriers to switching could mean platforms are less incentivised to provide the best service and value possible, especially as the investment platform market is dominated by a few major players.

A quarter of investors said they did not want to switch platforms because they were investing for the long term, suggesting that they may be mistakenly confusing their investment platforms with the funds or shares they use them to buy. The FCA's interim report found that only 10 per cent of private investors switched platforms in the past three years, and 6 per cent added an additional platform for new assets. Switching was defined as moving all assets onto a new platform in one go, gradually moving all assets or splitting assets between platforms.

The report also found that 7 per cent of investors who wanted to switch did not due to the effort and time it would involve, or the exit charges. Of the 201 investors surveyed that wanted to switch, 38 per cent said it was too time-consuming, 29 per cent said it was too complex and 28 per cent said exit fees made them decide against doing this.

The FCA is also concerned that some platforms do not allow you to switch your holdings as they are - 'in specie' – but rather make you sell your investments and then transfer your assets as cash.

"Evidence points to significant barriers to switching and these barriers are likely to affect consumers' ability to switch platforms," says the FCA. It added that if consumers could switch platforms more easily it would put more pressure on platforms to provide value for money. 

The platform industry is working on solutions to make switching easier and allow more investors to change platforms without having to sell their investments first. The regulator says it supports this and will ensure minimum standards are met to make sure they are useful.

The FCA is also considering forcing platforms to scrap exit fees.

"There is undoubtedly a cost associated with administering an exit, and platforms are building a protection against customers jumping frequently as that is not in their financial interests," says Mike Barratt, consulting director at consultancy firm the lang cat. "But platforms need to acknowledge that customers are not donating money to them, and will want to take their money off at some point. It does not seem reasonable to charge."

According to Investors Chronicle research conducted earlier this year only two of the 12 major platforms that offer Isas do not charge for transfers out. The remaining 10 either charge a flat fee, or charge per stock or fund transferred out. With smaller transfers, this could eat into considerable amounts of it.

"If I was looking to transfer right now, I would say the fees are unreasonable and try to get a waiver," suggests Mr Barratt.

Cash concerns

The FCA's interim report on its Investment Platforms Market Study found that, on average, private investors hold 8.8 per cent of their platform assets in cash. There are many reasons to have an allocation to cash, but platforms aren't generally a good place to hold it. Platform charges apply to cash holdings as well, but the rates of interest they offer are generally not as good as those you can get with banks or building societies. So for example, if a platform offers an interest rate of 0.25 per cent on cash but charges a 0.45 per cent platform fee, the cash balance will always fall in value.

Mr Barratt says: "For a lot of people there could be very good reasons to be invested in cash, but the reality is that platforms will continue charging you. Some platforms even take a skim on the interest rate, and the FCA doesn't like that."

The FCA has suggested forcing platforms to be clearer about the consequences of holding cash on their systems, to highlight to investors that it could be better to hold their cash in a current account without fees, or in a cash Isa.

"There is likely to be a change to the disclosure requirements," says Mr Barratt. "Platforms need to make it clearer to investors that if they are holding cash for anything other than a short period then an investment platform is not the place to do it."

Be proactive on price

Although the regulator found that many investors are happy with the level of service they are getting from platforms, it is concerned that some investors may be confusing product satisfaction and value for money with investment performance. Given how markets have performed in recent years, investors may simply be content with their platform because performance is strong. This means dissatisfaction could rise if markets and investment performance take a turn for the worse. Platforms are just a type of broker – a way to invest - and do not have any impact on actual investment performance, other than their fees which eat into the returns your investments make.

"People should make a value judgment on a lot more than price," says Mr Barratt. "But part of this judgment and the general happiness people have with platforms comes down to investment performance. When things change, it will not be the platforms' fault, but the fees investors pay the platforms will stay the same. In a falling market every penny you pay to your platform becomes quite important."

Although the FCA has made a number of recommendations to try to improve the service and costs of platforms, new rules are unlikely to emerge until at least next spring, so in the meantime you should take steps yourself to ensure you get the best service and value from your platform. This is particularly the case when it comes to value for money.

For example, the FCA's interim report found that most consumer dissatisfaction with platforms stemmed from charges, but only 44 per cent of the private investors it surveyed looked at more than one option when deciding which platform to use. 40 per cent of private investors surveyed said charges were the most important issue when selecting a platform, but 29 per cent of them did not realise that there were platform charges, or weren't sure if there were any.

Less than half of the investors surveyed were aware they paid an ongoing platform charge and an ongoing fund management charge, while only 10 per cent realised that if they left a platform they might incur exit penalties.

Forty-three per cent of investors said they researched charges when choosing a platform. Of those that didn't, 14 per cent said it was because the information was difficult to find.

The FCA says the lack of awareness "could be because charging structures vary across the market, platform charges are considered to be of lower importance than other charges or an assumption that the platform charge is a very low percentage with charges being 'much of a muchness' across the market".

European Union regulations that came into force in January should already have improved disclosures on charges, so the FCA will look at how well these are working before assessing platform charge disclosures. 

In the meantime you should compare and contrast platform charges as the total cost of ownership of your assets is important.

Doing this, however, is not necessarily easy. The FCA admits that it is currently difficult for consumers to choose a  platform on the basis of price. "It is not easy to find pricing information on platform websites," says the FCA. "Most platforms also have a large number of fees, different pricing structures and different ways of setting prices, for example, in pounds or as a percentage of the investment amount. Inconsistent language makes it even harder to identify and compare similar fees across platforms. Different charging structures can in principle reflect different consumer needs and usage patterns. However, the level of complexity appears to go beyond catering for this, and we are concerned by both complexity and the lack of transparency."

But platform statements provide this information, and we also regularly survey the costs for holding different types of accounts and products on the main investment platforms. 

For example, in the issue of 13 July we looked at how much different platforms charge to hold a junior individual savings account (Isa), and in the issue of 2 March we highlighted some of the cheapest platforms on which to hold a stocks-and-shares Isa invested in funds. Last year we looked at how picking the right platform could mean you pay less to hold investment trusts. 

If you are thinking of changing platforms, check out our broker comparison tool.