There have been further developments since my original blog post, on the topic of changes to TD Direct’s client monies policy, which cause me to re-examine the issue and its implications.
Firstly, I am pleased that Interactive Investor, TD Direct’s new owner, have responded to my post, as follows:
Interactive Investor’s primary responsibility is the security of a client’s data, cash and assets. Current FCA rules state that client money must not be placed out on unbreakable deposits of more than 30 days. Due to the capital impact of accepting CASS deposits of 30 days or fewer, a number of banks have stopped accepting client cash altogether. This in turn has meant that investment platforms have been facing difficulties in maintaining the necessary diversification of client money as per their agreed treasury policies. The FCA has recognised the problem, is reviewing the rules and in the meantime has invited platforms to apply for waivers to the 30 day rule as an interim solution. Interactive Investor has applied for this waiver in order to ensure that our strict treasury requirements – which have the express purpose of maintaining robust security for our clients’ cash – continue to be met.
The waiver is not intended to increase interest income for the investment platforms but to ensure that investment platforms are able to keep deposited client funds diversified and secure. Hargreaves Lansdown, Share Centre and other investment platforms have also applied for and been granted the right to place their client money on deposit for 95 days.
We are not in a position to benefit from the rates stated in the Share Soc report due to our classification as a financial institution.
There are a number of key points, as I see it, in this. Firstly, I note that II/TD are not alone in making this change. I have since received a missive from AJ Bell YouInvest, also stating:
We are making changes to our terms and conditions. The changes come into effect immediately for all accounts from 12 July 2017.
The changes explain that we now have approval from the Financial Conduct Authority (FCA) to hold your money in fixed term deposit or notice accounts for up to 95 days, instead of the standard limit of 30 days. The FCA has recently given approval for a number of other financial services firms to do so too – this is because the majority of banks don’t wish to hold money that’s subject to the FCA’s client money rules for 30 days. We’re now able to hold your money with a wider range of banks, and so mitigate the potential risks if any of our banking providers were to fail.
The changes will not affect your ability to make investments or withdraw funds. We will continue to carefully manage your money, ensuring there is always sufficient cash available to meet your requirements. In the very unlikely event of default by AJ Bell or one of our banking providers, you may experience a delay in accessing your cash. The changes will not affect any right you have to claim compensation under the Financial Services Compensation Scheme.
So, with this knowledge, it does appear that it was unfair of me single out II/TD for criticism. However that does not detract from my original cause for concern, which related to the fact that access to client monies could be further constrained in the event of some form of financial crisis. In fact, my concern is increased as it now appears that this issue is not confined to II/TD but is a general one, that will affect even more UK individual investors. What that implies is that ShareSoc’s focus on addressing this should be directed at the FCA, rather than individual brokers/platforms. More on that later.
Having discussed the matter further with my ShareSoc board colleagues, who have banking experience, they confirm the difficulties that II and AJ Bell highlight, with depositing client cash. Readers may be surprised to learn that in the current regulatory climate, banks are reluctant to accept substantial short-notice cash deposits. This is because doing so requires them to hold larger amounts of expensive capital, thus reducing banks’ returns in the current low interest rate environment.
Now, whilst I accept that my colleague’s calculation of the extra interest earned as a result of depositing client cash on a longer term basis may not reflect the terms achievable by financial institutions like II, nevertheless I would expect them to benefit from some additional interest income as a result of this change. As stated in my original post, that does not seem right whilst clients may suffer constraints on access to their funds in extreme circumstances.
To protect individual investors’ interests, I will therefore request a meeting with the FCA, at which this issue can be thrashed out. In such a meeting ShareSoc will represent individual shareholders’ interests and I will suggest that the WMA also participates, representing the broker community.