🔔 Financial Conduct Authority to review Savings - it couldn't come soon enough

The Financial Conduct Authority (FCA) has recently announced its intention to carry out a market study into the £1 trillion UK cash savings market, including the effects of ‘teaser rates’.

A little over 12 months ago, some of the best rates available to new savers were almost double what they are today. As if to exacerbate this problem the rates often included large bonuses or ‘teaser rates’ which meant that the rate was guaranteed to drop by a set amount at the end of the bonus period.  Bonuses formed such a large part of the interest earned that in some cases savers found themselves earning just 10 pence a year for every £100 saved, after only 12 months.  For example, one account last year paid 2.80% gross/AER including a 2.70% bonus for the first 12 months – meaning the rate dropped to a paltry 0.10% after just 12 months.

Since then however, the savings landscape has changed dramatically; the Funding for Lending Scheme (FLS) was introduced on 1st August 2012 – offering banks and building societies access to cheap funding to encourage them to lend to individuals and businesses. However, the nasty side effect was that providers suddenly had no need to access funding via savers and therefore the competition in the market all but dried up.  Almost overnight the best rates being offered started to fall. The cheap funds made available to savings providers meant that they started to show little to no desire to pull in new funds and the savers’ spiral of suffering really began.

Slowly but surely the bonus rates used to encourage more savers started to fall, then fewer and fewer accounts offered them. Currently, accounts with bonuses are scarce, presumably for a couple of reasons; providers don’t need to raise new money so there is no desire to tempt new savers with headline grabbing rates but also because the bonus actually offers savers some form of rate guarantee for a period of time, such as 12 or 18 months, as the majority of bonuses are fixed for a set period – surely providers would prefer not to be tied to this, in the current climate – they’d prefer to be free to chip away at the rates as they wish and not be restricted by the bonus.

And this is the environment that those savers from at least 12 months ago are now faced with. The best easy access rates are now just 1.50% to 1.60% and do not include bonuses, compared with 3% to 3.20% which were available last year (which did include a bonus).

Although we wouldn’t want to see the end to teaser rates as they are a valuable tool for the savvy saver, we can’t ignore that they are also a great marketing ploy, as providers know full well that a large majority of savers won’t move at the end of the bonus term. This is how providers can really gain, by luring them in with an inflated teaser rate.

On the other hand, they are a way for savvy savers to boost the amount of interest they can earn. Many savers will have benefitted from a bonus rate over the last 12 months as many interest rates have dropped like a stone. But with bonuses as large as 3% available last year, the real issue arises when these bonuses end; what the interest rate will be dropping to, is not always clear. It certainly differs from provider to provider, so making an informed decision can be difficult at best.

However, understanding the reasons why savers don’t switch will be key; understanding whether there is any way to encourage or support them to do so, without the need to banish teaser rates altogether will be valuable. This is why the FCA review is so important.

At the end of the day, if one trick is banished, another is likely to appear. Whilst bonuses are few and far between at the moment, currently the marketing gimmick seems to be restricted access. Many of the best easy access accounts are actually wolves in sheep’s clothing; make more than just a handful of withdrawals and there can be severe penalties.

Just because an account doesn’t include a bonus does not guarantee that the rate will remain competitive. Loyalty does not pay and most savers with old savings accounts are likely to have seen the rates they earn dwindle over the years, whether that is through a bonus ending, restricted access conditions or just the rate being chipped away over time.

In fact the last 12 months have seen over 1200 existing variable rate savings account rates cut and this shows no sign of letting up. September had seen the highest number of rate cuts this year, with 225 cuts for existing savers. The previous highest month was March, which saw 174 rate cuts.

Savers need to take care to check their rates, bonus or not, and importantly whether better rates can be found elsewhere. It’s quite simple – savers must monitor their accounts and if the rate they are offered is not the best available, consider switching - as every penny counts.

For the poor old saver we currently have a devastating combination of issues. Rates are falling relentlessly due to the FLS - even though the Bank of England base rate has remained at 0.50% for four and a half years, bonus rates are coming to an end, plus inflation remains stubbornly above its 2% target.

For basic rate taxpayers there are now just thirteen accounts beating the most recent inflation figure of 2.70% (and twelve of these are ISAs).

Whilst there has been a flurry of rate increases for new longer term fixed rate bonds, overwhelmingly rates have been falling.  So it’s essential that savers use all the tools in their armoury to get as much interest as they can; and to keep a close eye on their accounts, as no one is immune.