Five years ago, we wrote about the immediate disastrous effect that the Government’s Funding for Lending Scheme (FLS) had on the savings market. Little did we know just how much longer the scheme would be extended for or indeed that a new similar scheme (Term Funding Scheme - TFS) would be introduced at a later stage, in August 2016.
So, it’s with bated breath that we welcome the end of FLS this month and TFS in February this year.
FLS was introduced in July 2012 to incentivise banks and building societies to boost their lending and therefore bolster the economy. Quite simply, lenders were able to take in cheap funding from the Bank of England – in order to lend at low rates. In the first two years of the scheme, 46 lenders accessed £41.8bn, which fed through to borrowers as lower cost loans.
The perhaps unintended consequence of this was that these providers no longer needed to raise money from savers and therefore overnight, the best buy rates started to fall – even though the Bank of England base rate had been static at 0.50% since March 2009.
In July 2012 the best easy access account available was paying 3.25%. Today, we are excited about the fact that over the last 12 months, best buy rates have rallied and are now standing at around 1.30% - less than half the level they were just before FLS was introduced.
The latest statistics show that the outstanding FLS drawings at 30/09/2017 is over £43 billion – with a further £85 billion outstanding TFS drawings as at the same date. But at least the taps are being switched off.
Of course, while the access to this cheap money is being withdrawn this year, the providers will not have to pay all of the funds back for several years yet – however, we hope that the loss of access to this money will make the banks and building societies start to turn back to savers, as a way to raise at least some of the money they need for their lending activities.
Unfortunately, I’m sure that some permanent damage has been done – providers are now much more free to reduce savings rates outside of a base rate cut and I wouldn’t expect to see savings rates rising back up to the levels they were in July 2012, without the base rate increasing further – although on this point I would love to be proved wrong! We’ll just have to wait and see.