Hargreaves Lansdown website
Retail investors yanked money from equity funds as Covid-19 upended markets but are still liable for fees to the platform holding their cash © Charlie Bibby/Financial Times

The UK financial regulator has told do-it-yourself investment platforms to return cash to customers who pulled money out of volatile stocks and shares during the pandemic, to protect them from paying too much and suffering should a firm fail.

In a “Dear CEO” letter that applies to platforms including Hargreaves Lansdown and AJ Bell, the Financial Conduct Authority said companies used by self-directed investors were sitting on “significantly” large cash balances after customers sold out of high-risk assets during the crisis and parked their funds.

Hargreaves Lansdown, the UK’s largest DIY broker, reported £91.1m in revenue earned on cash at its half-year point in June, up 25 per cent on the same point last year. 

Customers lose out on interest when they hold cash in platform investment accounts and pay higher fees than they would do to a bank or building society. Record-low interest rates mean platforms generally pay no interest, with some charging a custody fee on the balances.

Retail investors are also at risk of enduring greater disruption in retrieving their cash from a broker than a bank in the event a company should fail, due to the way insolvency proceedings work.

“Clients can achieve much better interest rates in commercial savings accounts than in platform cash accounts,” said Mark Polson, founder of financial consultancy the Lang Cat. “[Holding cash in an investment account] is like going camping in a sports car.”

The FCA said it expected companies to prevent harm to customers and told them to contact clients and consider returning cash if it would be better suited to a bank or savings account.

Megan Butler, director of supervision for the FCA’s investment, wholesale and specialist division, said: “If it is in clients’ better interests . . . we expect firms to return client money balances which are unlikely to be reinvested in the short term.”

But some groups said not all in the industry had experienced a jump in customers holding cash and hit out at the suggestion that they should tell self-directed investors what to do with their money.

Richard Wilson, chief executive at large UK broker Interactive Investor, slammed the FCA’s suggestion as inappropriate for DIY customers who have not chosen to receive financial advice.

“Non-advised platforms simply don’t have the ability to judge whether a customer was likely or planning to invest their cash in the short term,” he said. “Personal responsibility has to come in somewhere. We are our customers’ agent and act on their instructions.”

AJ Bell said cash balances had only nudged up during the pandemic. The company has in the past contacted clients whose cash balances seem high.

“Market volatility was extreme in March and April and you would expect to see cash balances increase slightly as a temporary safe harbour,” the group said.

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