The FCA has released a fairly interesting occasional paper titled: “Fair exchange: presenting foreign
exchange quotes to improve consumer choice.”
The paper was written by Chris Burke, Lucy Hayes, Cherryl Ng and Laura Smart and looks at how and why consumers with an upcoming currency exchange compare exchange rates.
My favourite quote from the paper is “people with more FX experience and those with higher financial literacy are more likely to choose the best deal.”
This is of course, true, but as I have said many times before, the foreign exchange industry gets away with such opaque pricing because no-one really understands how foreign exchange quotes are calculated. I knew an FX dealer who would regularly convert $5m in one go and have a panic every single time about which way to mark the trade-up based on which way round the currency pair was quoted.
When I wrote about how fintech disruption is good for the foreign exchange industry as online-only money transfer providers like Transferwise offer fixed pricing for transfers it was a step in the right direction. But they still don’t do a very good of how they actually charge.
In my guide on how to compare exchange rates, I highlight one very simple question you must ask:
“How far from the mid-market are your exchange rates?”
The best way to get the best exchange rate is to ask, what the percentage mark up is and then ask again if it can be done any cheaper.
If you don’t get anything other than a straight answer try another provider as they are likely marking you up more than they should.
If you don’t ask this question, it is like buying stocks through a stockbroker and not finding out the commission until after the trade.
The only way to make foreign exchange transactions less opaque is to make providers show the percentage markup on a quote and transaction as a single % figure.
It’s all very well saying, “yes we show the mid-market rate and the client rate and the charge the charge they will incur relative to the difference”. But, if you are not one of the few highly financially literate who understand what this means and can figure the mark-up out, it’s pointless.
In our currency broker comparison tables, we don’t show that percentage, because, in reality, it’s different for every simple client. It stands to reason that a client who is converting £1,000 may pay a larger percentage than a client who is converting £100,000. In the same way with almost every financial product commission and fees charged are on a sliding scale based on the size of a transaction. The higher the value, the less you pay (relatively speaking).
You can read the full 56 page paper on the FCA website here.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.