The City regulator has written to investment firms over concerns about the way that interest earned on customers’ cash balances is dealt with.

The Financial Conduct Authority (FCA) has warned investment firms and Sipp (self invested personal pension) operators that it will step in if firms cannot demonstrate they are offering fair value and do not make the necessary changes.

The amount of interest earned by some firms has increased as rates have risen.

The regulator recently surveyed 42 firms and found the majority retain some of the interest earned on these cash balances, which may not reasonably reflect the cost to firms of managing the cash.

Many also charge a fee to customers for the cash they hold, known as “double dipping”, the regulator said.

The FCA is concerned these practices may not be providing fair value to customers and may not be understood by consumers or properly disclosed.

The practice of double dipping has raised concerns with the regulator and firms have been told to cease this.

The “Dear CEO” letter sent out by the FCA says: “Investment platforms and Sipp operators earn interest on the cash balances they hold for their customers.

“The amount of interest earned on customers’ cash balances has increased substantially in the last 18 to 24 months because of rises in the Bank of England base rate.

“In the month of June 2023 alone, the 42 firms we recently surveyed who retain interest collectively earned £74.3 (million) in revenue from this practice.”

A new Consumer Duty came into force in summer 2023, requiring firms to put customers at the heart of what they do, including when designing products and communicating with customers. Firms should be supporting customers to pursue their financial objectives.

The letter states: “Based on the information we received in July 2023 from a sample of 42 investment platforms and Sipp operators, we are concerned that some firms’ treatment of the interest earned on their customers’ cash balances may not be in line with the Duty.”

Based on the responses to the FCA’s engagement with firms, it found that around seven in 10 of the 42 firms in the sample retain at least some of the interest they earn on customers’ cash balances.

Of the platforms which retain interest, around six in 10 also charge a platform fee on the customer cash they hold.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “Rising rates mean greater returns on cash. Investment platforms and Sipp operators need now to ensure how much of the interest they retain and, for those who are double dipping, how much they’re charging customers holding cash, results in fair value. If they cannot make that case, they need to make changes.

“If they don’t, we’ll intervene.”

Firms will need to make any changes by February 29 2024.

On Tuesday, investment platform AJ Bell confirmed a package of pricing changes that it said it had been working on for some time, benefiting its customers by around £14 million a year.

Among the changes, from April 1 2024, AJ Bell is making several price reductions for customers investing via its platform in the direct-to-consumer (D2C) and advised markets, alongside increases to the interest rates paid on cash held by its D2C customers.

AJ Bell said the changes were factored into the financial guidance the company provided at its annual results last week.

Michael Summersgill, chief executive at AJ Bell, said: “Our philosophy has always been to share our economies of scale with customers as we grow – an approach that is very much aligned with the consumer duty. We announced £5 million of price reductions for our customers last year and have increased our interest rates on cash balances several times as base rate has increased.

“We have been planning these latest pricing changes for some time. Now we have clarity from the regulator, we are pleased to confirm another significant package of pricing changes which will benefit our customers to the tune of £14 million a year.”

He said the financial impact “is fully factored into the guidance we provided in our annual results last week and our enhanced competitive position puts us in a great place to continue to grow our market share”.