James Penn, head of equity at Capital International Group,

looks at an expected clampdown facing financial companies

The UK’s Financial Conduct Authority (FCA) recently announced that it was consulting about a ban on exit fees for platforms.

This is not great news for a business like ours (ie stock broking and investment management), given ‘substitutional costs’ work in the favour of brokers and asset managers, making the attractions of switching less clear cut.

(A platform is an online service that allows financial advisers to manage their clients’ investment portfolios.)

Anything to encourage clients to ‘think again’ about changing their provider is beneficial to the industry.

However, if introduced, it is something that will be welcomed by investors.

Exit fees for switching assets to another provider (or terminating an investment product early) are things that many investors will scarcely be aware of.

Buried in the small print, they kick in when someone tries to take their money elsewhere, but can have a very material cost.

As a result they can act as an effective frictional cost – useful in promoting the ‘stickiness’ of assets under management – and a barrier to new entrants.

Picture this: suppose one is dissatisfied with one’s portfolio performance or broker service, and decides to move to another broker. The broker then lands one with a bill for £800 (representing 30 stocks at a £25 per line cost) for the cost of transferring the assets to the next manager.

Confronted by these unexpected exit charges one thinks again. The existing broker follows up with a few consoling words ‘ensuring a better service next time’, and offers a few free deals to compensate. Finally, one decides against the move…

The FCA is also considering allowing customers to switch provider or platform without liquidating the portfolio.

Those affected are platform providers like Hargreaves Lansdown and Legal & General, as well as wealth managers like St James’ Place, plus stock brokers up and down the British Isles.

In other words, an awful lot of people…

There are clear parallels with the introduction of increased competition in the mobile phone, and energy supply markets, where the costs of switching have been dramatically reduced.

Stock brokers will argue that switching provider has real costs that need to be covered by a realistic set of charges.

But it looks as if the FCA will press ahead with legislation insisting on this at some point.

Interactive Investor, the second biggest platform in the UK, abolished its own exit fees last year, anticipating this move.

Any change (a final decision will be taken by the FCA in June) could open up space for more low cost ‘fintech’ companies to enter the market, though it is early days yet.

The development will not affect us here in the Isle of Man, given we are regulated by our own authority (the Financial Services Authority), but the rules here may be altered to reflect this in the future.

The opinions stated are those of the author and should not be taken as investment advice. Any recommendations may not be suitable for all, so please contact your financial adviser for further guidance. The value of investments can go down as well as up.