Will Consumer Duty really kill exit fees? If you search the FCA’s final Consumer Duty policy statement for ‘exit fees’ and you’ll get exactly one hit. If you hate the idea of being charged to take your own money elsewhere, you probably think that’s not a lot of hits. If you’re a firm that charges such fees, you’ll probably be pretty glad it doesn’t crop up more.
The FCA doesn’t like any ‘unreasonable additional costs’ for retail investors. That can include, the policy statement, says, where they ‘incur unreasonable exit fees or other charges, delays, distress or inconvenience’.
But that idea of reasonableness is an important qualification, and one that speaks to the heart of a real challenge for the regulator: that despite introducing a massive set of rules aimed at getting customers a better deal, exit fees might still live to fight another day.
What is unreasonable?
Because what exactly defines whether or not an exit fee is reasonable? The FCA, in its inimitable style, doesn’t put a number on it. It’s not a pricing regulator after all. But the frustrating thing for advisers, platforms, and everyone else might be it doesn’t really give a methodology you could use to work it out either.
The FCA says ‘Unreasonable barriers are those which are likely to cause retail customers to take unreasonable additional steps to progress their objectives, including steps which are:
- unreasonably onerous or time consuming; (ii) complex for a retail customer to carry out; or (iii) difficult for a retail customer to understand; and asking retail customers for unnecessary information or evidence;’
Note these are all subjective judgements. They rely almost entirely on your own view of what counts as onerous, complex, or unnecessary.
And even if you agree on those definitions, you then have to prove that those barriers were ‘likely’ to cause the investors to take the aforementioned additional steps towards their objectives.
If you really wanted to get into the semantics here – and I’m sure certain firms will – you could argue that yes, our product was difficult to understand. But that didn’t actually cause the customer to have to take any additional steps to get what they wanted. They got it anyway. It’s just that in this case it came with exit fees.
The SJP model
None of those aforementioned examples of ‘unreasonable’ barriers really gives anyone a yardstick to definitively say that – plucking a number out of thin air here – a 6% exit charge is unreasonable, but a 2% one is fine.
Figuring that number out is incredibly important. It just so happens to be that the largest advice firm in the UK charges exit fees. But it is less alone than you might think. When Money Marketing surveyed 14 DFMs back in 2018, it found that 10 of them operated exit charges ranging from £15 to £50 per line of stock.
And that’s not forgetting platform exit fees, of course, which the FCA decided not to impose an outright ban on last year. Platforms might not make a lot from exit fees – the FCA estimated less than 1% of revenue on average. But for major advice firms it is likely to be more than that.
Let’s use a hypothetical large advice firm as an example and do some very crude maths.
Let’s say the firm has £150bn in assets. It has 868,000 clients. So that’s average assets of £170,500 per customer. It has a 96.5% client retention rate (wow). So every year it loses around 26,040 clients, with a combined £4.4bn between them.
Exit fees range from 1% to 6%, so let’s take a 3% midpoint. That is, theoretically at least, something like £133m of exit fees that could be payable on those assets.
That is a gross simplification, obviously. It will likely be way off base. For example, such a firm could apply exit fees only on new money, and not restart the clock again on previous tranches. And clients with large exit fees would be less likely to leave anyway.
But if you think a company that makes £405m in profit each year won’t spend a few quid on lawyers to defend that income stream, you’re mistaken. The point is, if that ‘unreasonable’ number is 0% – not 1%, not 2%, not 6% – but big fat nothing, that will have a much bigger financial impact on firms that just rewriting a few client agreements. If anyone was hanging around just because they didn’t want exit fees, outflows should also increase with a resultant drop in revenues.
Deferred advice fees
You could well argue that firms have had ages to prepare for this, therefore the regulator is likely to take an uncompromising line. But how do you turn round the juggernauts that are the UK’s biggest advice firms and platforms and force them to act against their own commercial interests?
There are simpler solutions that the regulator might be happy with – reduced exit fees on new clients, say. But there’s no guarantee that legacy clients won’t be left wanting.
It’s not as if the FCA hasn’t known these charges have existed for years. Yet they still exist. Firms have felt the heat, they just haven’t done anything about it.
If certain firms can’t even bring themselves to utter the word exit fees – steadfastly referring to them as deferred advice fees – then it’s highly unlikely they will roll over without a fight when the heat is turned up even further.
The same grey areas abound in other issues of long-standing concern for the FCA, where it has found it tough to turn its constant critiques into tangible action to stop people actually doing the things it finds objectionable.
From my discussions with people in and around the regulator, one thing is for sure: it definitely has a problem with chunky ongoing advice fees. But proving categorically that a particular fee level is excessive when a client is ostensibly happy to pay it – or at the very least has signed a piece of paper saying they agree to it – risks running aground in the shallow regulatory waters of paternalism. The same goes for exit charges.
There are other oblique references to the cost of switching services in the policy statement, for example ‘we expect firms to support customers… including in exiting their product where appropriate.’
But this is in the context of a customer in financial difficulties losing internet or mobile access, and a digital‑only support offering exposing them to the risk of harm.
The FCA doesn’t want firms to ‘include any explicit or implicit exit charges that have the effect of making the investment illiquid even though there are technically frequent opportunities to dispose of, redeem or otherwise realise it.’
But again try proving beyond reasonable doubt that the sole reason you are not liquidating your very much liquid portfolio is because of an exit charge.
The FCA has its eyes squarely on a target. But whether it hits the bulls eye will be another question.
Photo by Afif Ramdhasuma on Unsplash.com
