Under new rules all firms will have to set a single easy access rate (SEAR) across all easy access accounts. Firms will have flexibility to offer multiple introductory rates for up to 12 months, then they will need to choose one SEAR for their easy access cash savings accounts, and one for their easy access cash savings ISAs.
The FCA has previously raised concerns that competition is not working well for many of the 40 million consumers who hold either an easy access savings account or easy access cash ISA.
Many longstanding customers currently receive poor outcomes and the FCA wants firms to focus more on these savers.
These proposals aim to improve competition in the market, encouraging firms to increase the interest rates they offer as well as protecting those consumers that currently receive the lowest interest rates.
Christopher Woolard, executive director of strategy & competition at the FCA, said: “Competition is not working well for many of the 40 million consumers with easy access savings accounts and we want that to change.
“Our proposals would mean firms have a single rate for customers immediately after their accounts have been open for 12 months. Firms will choose the rates they offer, and the rates they offer will have to be clearly published.
“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.
“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.’
Competition
The FCA expects that longstanding customers will benefit from higher interest rates because firms will compete on the SEAR.
The SEAR works by requiring firms to pay the same rate to longstanding customers as to customers who have recently come off an introductory offer and are deciding whether to switch or stay with their current product.
To retain customers coming off introductory offers, it is expected that firms will set their SEARs higher than the current rates offered to longstanding customers.
Publishing data
The proposals will also require firms to publish data every six months on the SEARs they offer. This will make them easier to compare at the time of opening their account, with the rates that other firms are currently offering.
Longstanding customers would also find it easier to see whether their existing product gives them a good interest rate because their provider will have only one such rate rather than many such rates changing over time.
The proposals are limited to easy access savings accounts because this is where the FCA found harm in the cash savings market study.
The FCA is now seeking feedback on the proposals set out in this Consultation Paper, by 9 April 2020.
UK Finance response
Eric Leenders, managing director, personal finance at UK Finance, responded: “The banking and finance industry has already implemented a number of remedies to improve competition in the cash savings market, helping savers to shop around and find the best possible deal. These include communicating more clearly with customers about the rates they receive, faster Cash ISA transfers and enhanced customer prompts before a rate is reduced.
“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.
“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, including those in vulnerable circumstances and borrowers, whilst avoiding unintended consequences impacting innovation and competition in the cash savings market.”
Consumers could be £6.50 better off
Personal finance expert Andrew Hagger commented: “It’s good to see the regulator trying to simplify the easy access cash savings market but it’s too early to know if this will have a positive outcome for UK savers.
There has been little appetite for savings balances from the main banks and building societies in recent years, and it’s unlikely that they will want to pay more overall to attract cash balances and take a hit on their profit margins.
Longstanding customers may see a slight improvement in rates, but the cost implication of this move could mean lower rates for new customers.
The FCA states that consumers will benefit by £260 million from higher interest payments – with the reported 40 million consumers holding an easy access account that’s an average of £6.50 each.
