Introduction

As the Bank of England base rate remains at a historical low for the UK there has been a gradual increase in deposit rates since the start of the year. We have seen a shift in life since the start of 2020 and have seen favourable changes in behaviour and attitudes around cash.

Savers have squirrelled away almost £200billion since the pandemic hit according to the latest Bank of England figures.  Savers currently have approximately £1.7trillion stashed away in bank accounts, according to the Bank of England, fuelled by record levels of savings over the past year.

However, clients’ cash holdings have historically been overlooked as an asset class and generally lower down the priority list especially now as interest rates remain at record lows and inflation is on the rise. This may be due to client inertia, the paperwork involved in opening accounts and the manual process of managing the accounts on an ongoing basis or other areas of financial planning taking priority. It could also be because clients’ were not saving en masse in the way we have seen happen recently.

Deposit rates

With NS&I cutting rates towards the end of last year and historically low-interest rates, finding decent returns for clients’ cash deposits had been very challenging.

At the start of the year the top 1 year fixed rate was 0.6% and now we’re seeing the top 1 year fixed rate at 1.35%*.

The elephant in the room for savers is inflation. The Consumer Prices Index measure of inflation had increased in the 12 months to September 2021 by 3.1% according to the Office for National Statistics (ONS) which is faster than expected. Unfortunately inflation is rising quicker than savings rates. However, there is still demand and a need for  savings rates due to short and long term cash requirements and safety.

Cash Management Platforms – how do they work?

Cash management platforms carry many benefits. For clients with significant cash deposits with one bank, there has always been potential for exposure to unnecessary risk if a bank were to go into administration and also an increased potential to miss out on an opportunity to earn more interest by not shopping around. Clients may not have the time nor energy to do so and may not even realise that they are not making the most out of their cash thinking that they are benefiting from the best rate available. Cash management platforms have been created to take away the laborious process of completing multiple bank application forms to be able to move cash deposits at the click of a button, mitigate risk for the client and have a holistic view of some of the best rates on the market.

This can be a great solution for individuals and businesses but especially for advisers who work with attorneys for Power of Attorney (PoA), court-appointed deputy (CoP) and Trust clients. In these cases the attorney will generally insist that the beneficiary’s funds are fully protected by the financial services compensation scheme (FSCS), generally capped at £85,000 for individuals.

A cash management platform aims to provide a simple, seamless process providing clients with access to multiple cash deposits in a safe, secure manner.

For example, a client who only has to onboard once through a one-time application process will only take a few minutes to get started; all they need to do is input their details and once they have passed the necessary checks in minutes can access many cash deposit options instead of spending time applying to each individual provider. Powered by technology, it is a hassle-free way for advisors and clients to interact with each other, and both receive a service that may have once seemed complex, in an uncomplicated, automated way.

Risk Management

On the legal and regulatory side, cash management platforms are required to treat all monies deposited on their platform in a manner that ensures that at all times, there is no exposure to their balance sheet or its creditors. Specifically, they will establish a number of trust accounts with each bank providing a letter of assurance that the monies are held for the benefit of customers only “Trust Letter”. These Trust Letters are similar to what banks provide other regulated and professional firms holding client monies and provide the legal security for customers against the service provider and their creditors.

From a flow of funds perspective.  Funds will come from the clients account to what is often referred to as a  “Hub” account.  This will generally be offered by a high street, well known bank.  Once funds are cleared into the “Hub”, clients will then be able to allocate those funds out to the panel banks. All accounts have Trust Letters in place and are reconciled on a daily basis (another regulatory requirement) to each customer. Further protection is granted to each customer by ensuring monies deposited to each underlying bank can only be paid out to the originating account nominated by the customer and reviewed as part of the initial checks. In other words, monies in the “Hub” account can only be remitted out to the customer’s original bank account.

In the event of the platform going into administration, its creditors cannot claim any entitlement to the monies deposited by customers. All monies deposited will continue to be held by the underlying banks. Upon expiry of the term of each product, monies will either be returned to the customer nominated account (source) or distributed to the customer by an independent administrator.

The operational and legal arrangements of cash management both with banks and clients are designed to preserve FSCS eligibility for clients with each bank. It is recommended that any adviser or client looking to use these services conduct their due diligence before using these types of services. For more information on the Financial Services Compensation Scheme (FSCS), please refer to www.fscs.org.uk.

Inherently with a service like this there is a fee which varies from provider to provider, whether that is a percentage fee against the deposit size on the platform or the fee is taken from the gross interest received. Some banks, who could have market-leading rates, may also choose not to work with cash management platforms and offer their products and services directly to the client with their in-house wealth management team.

CEO letter from FCA to banks using deposit aggregators

In a letter dated 14 April 2021, in brief, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) highlighted the possible risks associated with the growing volumes of deposits that are placed with banks and building societies via Deposit Aggregators and how to reduce these risks.

Although deposit aggregators are a relatively new concept, we are pleased to see the recognition they are receiving from the FCA; furthermore, that they can see the benefits to the clients who are at all times, the main focus for platform providers in the industry. We always believe that regulation is a positive move so that full protection is guaranteed for all involved, however, we also see that over-regulation can disrupt the potential for innovation — innovation that also benefits clients who want to benefit from financial products and services that can help them boost their financial health, and support their future financial plans. We 100% agree with the FCA that there is no need to, “stifle competition or innovation … and are keen to work with firms to ensure that regulatory objectives are not compromised by the adoption of new business models”, as discussed in their letter, and welcome the finalised guidance on which we will provide feedback.

*as at 15 November 2021