Britain’s top financial watchdog plans to overhaul the cash savings market, forcing banks to be more transparent about interest rates offered to customers.
The Financial Conduct Authority (FCA) said on Thursday it was proposing changes to how interest rates are offered on ‘easy access’ savings accounts and ‘easy access’ cash ISAs.
The regulator wants to force banks to set one universal interest rate for accounts and ISAs to stop lenders luring customers with an attractive rate and then gradually cutting over time.
Christopher Woolard, executive director of strategy and competition at the FCA, said the current savings market is “not working well” for loyal customers, many of whom see interest rates reduced and would be better off moving.
“We are concerned that many long-standing customers are seeing a poor outcome and we want firms to focus more on these customers,” Woolard said.
The new rules will still allow banks to offer a higher introductory rate for up to 12 months, but customers will then be switched on to a single set rate across the bank.
Many banks currently offer a wide range of interest rates on different savings accounts, depending on things like whether the account is online-only, when a customer signed up, and when the account was first launched.
The FCA said the transparency should promote more competition for customers. It believes the changes will lead to higher interest rates and the FCA expects a £260m windfall for the UK’s 40m savers as a result of the new rules.
“Firms will choose the rates they offer, and the rates they offer will have to be clearly published,” Woolard said. “This will prevent firms from gradually reducing interest rates over time and make them compete for all their customers.”
Eric Leenders, managing director for personal finance at UK Finance, the bank lobbying group, said the industry “has already implemented a number of remedies to improve competition.”
He also warned the changes could lead to higher rates for borrowers by eating into banks’s profit margins.
“Banking business depends on there being an adequate margin between what a provider pays for its deposit funding and what it charges for the loans it makes available,” he said.
“Regulatory intervention that increases the overall cost of deposit funding for providers will, in general, result in providers having to raise the cost of loans they make available to house purchasers and other borrowers.”
The average interest rate on ‘easy access’ accounts is just 0.59%, according to comparison site Moneyfacts.co.uk, and the UK interest rate stands at 0.75%.
Laura Suter, a personal finance analyst at investment platform AJ Bell, said the FCA’s proposals “would be a dramatic change to the cash savings market.”
“However, the move will still mean that to get the best rates you need to shop around,” Suter said. “It’s estimated that cash account customers miss out on £1.1bn in interest by not switching to a better rate, and this fix from the FCA doesn’t solve that.”
The FCA will consult with bank on the proposed changes until April, before advancing the new rules.
“UK Finance and its members will consider these proposals carefully and will continue to work closely with the FCA to ensure fair outcomes for all customers,” Leenders said.