Hargreaves Lansdown (HL.), who claim to be the largest UK investment platform, announced their Preliminary Results yesterday (9/9/2015). I have made some comments recently about the benefits stockbrokers receive from client cash funds, and in particular the fact that dividends received by holders of nominee accounts are received and retained by the broker unless asked for, instead of being paid direct to the shareholder as happens when you are on the share register. So I thought it useful to look at the financial figures of Hargreaves Lansdown who only offer nominee accounts.
They have 736,000 active clients and client cash held is £5.5 billion (see Note 10), i.e. about £7,500 each on average on which they pay no or little interest. In the good old days, stockbrokers used to pay significant interest on cash deposits but now few do, or the interest rates are trivial. So HL pays zero interest on cash held within share dealing accounts other than SIPPs below £5,000, and only 0.05% on higher figures. In effect a miniscule amount.
HL report that interest rates remain low and “therefore income from cash balances remained low” and “in the short term we continue to experience subdued margins on cash balances”. They also complain that the FCA introduced restrictions on the use of term deposits for client money from the 1st July 2014 which reduced the margin on client money to 0.53% from 0.91%. How much of their profits arise from the interest margin? It’s not immediately obvious from the published announcement but 0.53% of £5.5 billion is £29 million. Profit before tax was £199 million last year so that contributed 14.5% of profits.
The reduction in interest margin (although they now seem to have side-stepped the regulations for SIPP accounts), no doubt contributed substantially to the overall fall in profit before tax which was down by 5%.
One can understand why stockbrokers are so keen to use pooled nominee accounts rather than have shareholders receive the dividends directly that are rightly theirs. But it’s to the disadvantage of their clients. This is one reason why ShareSoc believes investors should own shares directly and be on the register of companies and that nominee accounts should be actively discouraged (and not be required for ISA or SIPP accounts). See our shareholder rights campaign here: www.sharesoc.org/campaigns/shareholder-rights-campaign/