BLOG: ‘The case for a Single Easy Access Rate has never been stronger’
In early 2020, the UK regulator the Financial Conduct Authority (FCA) consulted on a proposal to introduce a Single Easy Access Rate (SEAR) into the cash savings market. The idea was simple and compelling: it would have required providers to set and publish a single interest rate for their easy access accounts that could then be made available on provider and public websites for easy comparison by everyone.
It was akin to the long-established concept in the mortgage market of a Standard Variable Rate, or SVR, which is a traditional benchmark rate for mortgages.
The rationale behind SEAR was to make the savings market more transparent and to encourage customers to consider shopping around for a better deal. In doing so, providers would be encouraged to compete more assertively for deposits.
It was unashamedly pro-consumer, pro-competition and pro-switching.
The regulator was not attempting to set rates per se, but it was seeking a better functioning market leading to better outcomes for customers. It was what economists would call a ‘supply-side intervention’ to improve a perceived market anomaly or failure.
Aldermore publicly supported the initiative. We’ve always only had one easy access rate and we pride ourselves on ensuring the rate has been applied to all customers; we’ve never offered a higher easy access rate to new customers at the expense of existing customers.
SEAR shelved: ‘A huge, missed opportunity’
Regrettably, however, the proposal was shelved in late 2020. This was due to interest rates remaining stuck at historically record low levels, meaning that rate comparisons were less significant.
In addition, the country was still wrestling with the Covid-19 pandemic and there were more urgent priorities requiring attention. While understandable, this was a huge, missed opportunity in my view. Since then, the case for re-visiting the concept of SEAR has grown stronger and increasingly urgent. So, why now?
Firstly, inflation and interest rates are rising rapidly. Every single one of us will have noticed this in some way, whether you’re remortgaging your house, doing the weekly shop or paying monthly energy bills.
In December 2021, the Bank of England base rate was 0.1%. It’s currently 2.25% and will likely end the year higher still – some say to 4% or more – to tackle soaring inflation.
Gap in best and worst paying savings accounts has widened
The effect of this dramatic increase in rates has been for savings rates to also rise. Further, the differential between the leading easy access rates in the market (now paying more than 2.5%) and the rates paid by some larger banking providers (where rates can be close to 0%) has widened.
The best rates are consistently offered by the so-called ‘challenger banks’ (such as Aldermore and our competitors), whereas the bigger providers don’t tend to compete for deposits in the same way.
This is because their funding sources tend to be more diversified, drawing upon a wider range of products including current and commercial accounts as well as corporate deposits.
These banks also tend to make more use of wholesale funding such as that provided by various Bank of England schemes in recent years. The larger providers would typically have a ‘stickier’ customer base, who tend to remain with their bank because of the inertia linked to their main current account or an established branch relationship. As a result, their customers are less likely to shop around, and many languish in very low-rate accounts.
Secondly, the Covid crisis and the ensuing economic fallout – slow growth and rising inflation – have reminded us of the need to build a degree of financial resilience. Arguably, the first place to build that resilience is to move surplus cash into an easy access savings account. This is your ‘rainy day’ account, and the general rule of thumb is normally to retain up to six months’ worth of income in case of need; but whatever you can afford still makes for more sound financial planning, than not saving at all.
Savings habit and a buffer
As well as getting into the habit of saving some of your earnings, the other incentive is to maximise the interest received on that capital – further building your buffer. The SEAR proposals, crucially, would have provided a competitive impetus to support both of these objectives.
Thirdly, there is the question of fairness. SEAR would be consistent with improving access to savings and supporting a sense of levelling up across society. It’s not unreasonable for consumers to ignore or defer the savings habit if the returns are so low – ‘why bother’ they might understandably say. Banks are commercial organisations, but they also have a wider social purpose and responsibility. Is an account that pays say 0.1%, or less, in interest, really even a ‘savings’ account?
The FCA has since published new Consumer Duty regulations, which require firms to ensure that customers are getting a good outcome. This is progressive regulation and is designed to span the entire customer experience, including price and value.
Firms will need to satisfy themselves, and the regulator, that the price of a product is consistent with good customer outcomes and prevents harm. Time will tell how this new regulation affects savings rates but, for now, it seems less specific and targeted than the original SEAR proposals.
Government or regulatory intervention on price is a controversial subject. Some say that markets should operate without encumbrance and that competition will reward those firms that offer the best prices or value. Despite a material growth in the level of new entrants into the savings market in recent years, the overall market has been slow to respond, with considerable numbers of savings balances still concentrated in a small number of large and established providers that offer very low rates of interest.
Customers are, of course, free to deposit their funds with whom they wish, but a helpful nudge to remind them of the alternatives is surely a smart thing to consider. The rationale and likely benefits behind SEAR remain compelling, and we would encourage its re-appraisal to support a better deal for customers.
An FCA spokesperson said: “Firms must be transparent and fair with the rates and products they provide to customers, for example by notifying them in good time of disadvantageous rate changes.
“We will always look at the options available to us to prevent significant harm to consumers, and our new Consumer Duty will make sure firms are putting their customers’ needs first.”
Ewan Edwards is director of savings at Aldermore