PERSONAL ACCOUNT

Banks have a loyalty problem – but a basic savings rate is no answer

The savings marketplace is broken, but can the regulator really protect us from our own folly? This week the Financial Conduct Authority (FCA) laid out new suggestions that it hopes will help to protect absentminded savers. The result was both bold and disappointing: a radical plan to introduce a basic savings rate that nonetheless fails to tackle the deeper issues.

The problem is easy to state: the world of finance has no loyalty scheme. If you’ve been saving with the same bank or building society for a long time, you’re getting a bad deal. That’s because the financial industry makes money by keeping long-term customers’ interest rates as low as possible, while using the best rates as a lure to draw in new business.

A 2015 study, also by the FCA, found that there was £108bn held in easy-access cash Isas in the UK. One in five of those Isas had been open for more than five years, and these loyal customers got an interest rate 0.87 of a percentage point lower than the most recent customers. The same report found £354bn in easy-access savings accounts – and a full third of these accounts were more than five years old. Again, longstanding customers were rewarded with a rate 0.9 points lower than new customers were offered (0.2pc compared with 1.1pc).

Banks and building societies can get away with this because we are loyal to a fault. Or, in harsher terms, too lazy to switch. In the past three years only one in 10 of us switched our cash savings or cash Isa provider.

Two thirds of us hold our cash savings account with the provider of our current account. And although the FCA has been trying to teach setin-their-ways savers how to switch to get a better deal since 2015, the lessons haven’t been sinking in.

Enter its new idea: the basic savings rate (BSR). Under the proposed rule, a firm would have to set a basic minimum interest rate across all its accounts. While new joiners could still be offered a better deal to draw them in, when after a period of time the firm started dialling back its rates, it could only go so far. A long-standing customer couldn’t be pushed on to an interest rate below the agreed minimum.

The watchdog estimates that such a change could be worth a total of £300m a year in extra interest paid to savers. This should be true even taking into account the so-called waterbed effect, where pushing up rates in one part of the market causes rates elsewhere to sink, as banks seek to rebalance their costs. With hundreds of billions in cash savings to spread the extra £300m across, the overall increase isn’t as impressive as it may sound: it works out to an increased interest rate of just 0.084pc.

And in practice the impact could be negative, depending on the type of saver you are. While loyal savers could expect to see a meaningful increase in their interest rates, “midbook” customers who are less loyal but no longer on high introductory rates would

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Britain’s savings marketplace is broken