Are Investment Providers Profiteering by Not Passing on Better Base Rate Changes?

After a period of continuous rises in interest rates by the Bank of England (BoE), which has seen it reach its highest level since 2008, there is currently some debate as to whether investment platforms are doing enough to pass on the interest to investors, or seemingly benefiting in the current market conditions.

The UK continues to battle through uncertain cost of living challenges, which, coupled with a volatile market may mean some investors are reluctant to invest cash into tied down long-term investments.  Instead, many more are choosing to hold larger amounts of cash for longer periods. Any cash they choose to hold on investment platforms tend not to benefit as much as other products from the steady increase in interest rates since the emergence from the pandemic.

Providers will argue that platforms are not designed as savings accounts. Any cash held tends to be cash in transit, or small amounts held for a short amount of time. Investment Platforms are intended for investments, so customers shouldn’t expect returns on cash.  If customers want better returns on cash they are choosing not to invest, they should seek out the best deals and transfer to the right product offering for their needs, such as Cash ISAs, or Savings Accounts.

However, if investors are sat on large sums of cash for longer periods than usual, are providers doing enough to proactively identify these customers and provide them with the necessary information or resources to help make informed decisions on the options available?  But equally, are investors taking enough responsibility and using all the available resources to find the best products on the market and taking action?

The FCA certainly believes providers should be doing more and there will likely be changes introduced as a result of Consumer Duty, for instance under “fair value”.  The regulator has shared that many people are feeling the impact of increased interest rate rises and cost of living hikes, therefore it is more important than ever that customers are treated fairly when it comes to the interest they receive.  For comparison, at the end of June, the average interest payment on cash in an ISA across eight of the largest platforms for £50K-£100K was 1.9%, compared to an average of 4.2% on easy or instant access Savings Accounts offered by some banks. It would be unreasonable for anyone to expect investment providers to pass on the full interest rate, as they themselves only receive the rate banks pass on to them, but bridging the gap between the current rates providers offer compared to those offered by banks might be considered a fairer outcome.

The FCA is also considering introducing a new rule that would require investment providers to publish more information about how they set their interest rates. Both actions will seemingly increase transparency and help investors to make more informed decisions about where to get the best value for their money.

Investors will expect investment providers to do more and pass better interest rate rises on, but they themselves must make sure they are doing all they can to seek the best deals based on their needs. Providers may set lower rates, but they present a fair argument they are not here to offer savings account product rates. They must meet their regulatory obligations under Consumer Duty and ensure that customers are not in the wrong product for their needs, including people hold large quantities of cash in an investment product.

Time will tell if investment platforms are doing enough for their customers and avoid falling under same profiteering allegations as several major UK high street banks.