Banks will be banned from quietly cutting interest rates on cash savings accounts as part of proposals meant to help consumers pocket an extra £260m a year.
The Financial Conduct Authority’s changes would still allow banks to offer a range of introductory interest rates to attract new customers. However, lenders would then have to offer a single rate for all easy-access cash savings accounts after 12 months. That rate would be openly published twice a year.
The rules, which will now go out for consultation, are meant to increase transparency and competition across the easy-access savings market, which has been accused of taking advantage of customer inertia.
“Competition is not working well for many of the 40 million consumers with easy-access savings accounts and we want that to change,” said Christopher Woolard, the FCA’s executive director of strategy and competition.
“This will prevent firms from gradually reducing interest rates over time and make them compete for all their customers. We are concerned that many longstanding customers are seeing a poor outcome and we want firms to focus more on these customers,” Woolard added. “The new rate will also make it easier for savers to know whether they are getting a good deal after any introductory offer has expired.”
The move is expected to force banks to increase historically low interest rates in order to retain longstanding customers after their rates become public.
The FCA has estimated that savers will be handed an extra £260m a year in higher interest payments as a result. While some of the most attractive interest rates may drop “very slightly”, the regulator believes rates for the least competitive end of the market – primarily longstanding customers – will increase overall.
Laura Suter, a personal finance analyst for investment platform AJ Bell, said the regulator’s plans would mark a dramatic change in the cash savings market. “It will mean banks can’t hide behind a vast array of different interest rates for cash accounts, depending on how long ago you opened the account, whether it’s run online or in branch and what branding the account has been given.”
But the bank lobby group UK Finance warned that the the move could result in higher interest rates for borrowers and mortgage customers.
Eric Leenders, a managing director at UK Finance, said: “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.
“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.”