Loyalty penalty and rip off exit fees remain as watchdog drops market probe
The Financial Conduct Authority (FCA) said it needs to stop or postpone certain work in light of the ongoing impact of coronavirus and economic conditions.
One area is on proposals to bring in a Single Easy Access Rate (SEAR) as it looked to crackdown on the loyalty penalty in the easy access market.
In January it called on firms to stop quietly chipping away at interest rates for loyal customers and instead offer existing customers the same interest rate as those who’ve recently come off an introductory offer.
It came after research revealed customers who opened an easy access cash savings account more than five years ago received an interest rate that was an average 0.42 percentage points lower than the going rate for new customers.
In the easy access cash ISA savings market, the difference was greater at 0.55 percentage points.
In today’s update, the FCA said: “Given the continuing impact of coronavirus and the low-interest rate environment, we have decided to stop this work. As interest rates for new products fall, so does the gap between rates paid to new and longstanding customers, and the size of the harm falls.
“We therefore do not consider that introducing the SEAR would be proportionate to the current level of harm in this market. However, we will continue to monitor the market and we may revisit our priorities if we see significant harm to consumers in the future.”
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “It’s never a brilliant idea to abandon a well-crafted strategy because it doesn’t happen to suit the current market environment, but in this case the basic savings rate was far from perfect.
“In protecting very loyal savers from being ripped off, it risked building a model whereby everyone had to switch every year or suffer the consequences. It was based on the assumption that it would change saver behaviour, and get us switching.
“Even if savers started switching more often, the FCA modelling showed that loyal savers would only be a smidge better off, while regular switchers would pay the price of lower introductory rates.
“It has said it will keep its eye on the market, so we could see plans dusted off when rates rise. However, there’s still plenty of work to be done before a basic savings rate could become a real game changer in the savings market.”
Investment platform exit fees
In March 2019, the FCA moved to ban exit fees levied by investment platforms to make switching easier.
The rules were expected to come into effect on 31 July 2020 before being pushed back six months to 1 February 2021.
The FCA said: “The exit fees consultation was one of a number of remedies to address barriers to switching, including new rules to make moving platforms easier which have already been put in place and come into force in February 2021.
“We have therefore decided to stop the exit fees work but will be closely monitoring the situation, with the potential to consult on new rules if market changes lead to harm re-emerging in this area.”
Richard Wilson, chief executive, interactive investor, said: “We are saddened to see this news snuck out on the afternoon of Friday 13th. Exit fees are a recipe for rip offs and a genuine barrier to consumers seeking better value for money – they should have been banned.
“The FCA rightly points out that the direction of travel in the industry has been away from exit fees, in large part because interactive investor and Hargreaves Lansdown have done away with them. But there are still platforms out there that have grown far too complacent, relying on customer inertia and hefty penalties.
“Scrutiny on exit fees needs to be extended to life companies, asset and wealth managers, life insurers and beyond. We are completely bewildered by the FCA’s announcement and today is a sad day for consumers.”