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Watchdog cracks down on ‘loyalty penalty’ in easy access cash market

Paloma Kubiak
Written By:
Paloma Kubiak

The financial regulator is calling for firms to introduce a higher, single easy access rate for cash savings to prevent them quietly chipping away at interest rates for loyal customers.

The Financial Conduct Authority (FCA) revealed that firms compete vigorously for new business in the easy access market by offering high introductory rates. But they don’t face the same pressure for existing customers so they’re able to cut interest to paltry rates over time.

It found that 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.

Given that three quarters of consumers in the UK hold easy access savings accounts – around 40 million people – the FCA has set out two proposals to ensure loyal, back-book customers receive higher rates of interest and to encourage competition in the market.

It wants firms to introduce Single Easy Access Rates (SEARs) applied to accounts after a customer has been with the firm for 12 months. Before that, firms can offer multiple introductory rates.

As such, existing customers will be paid the same amount of interest as those who’ve recently come off an introductory offer.

As part of the proposals, firms will also be required to publish data on their SEARs every six months to make them easier to compare for consumers.

The FCA estimates that consumers will benefit by £260m from higher interest payments as a result.

Christopher Woolard, executive director of strategy & competition at the FCA, said: “Our proposals would mean firms have a single rate for customers immediately after their accounts have been open for 12 months. Firms will choose the rates they offer, and the rates they offer will have to be clearly published.

“This will prevent firms from gradually reducing interest rates over time and make them compete for all their customers. We are concerned that many longstanding customers are seeing a poor outcome and we want firms to focus more on these customers.”

‘Firms taken advantage of long-term customers’

Jenny Ross, editor of Which? Money, said: “For too long now, savers have found themselves stuck earning paltry returns as firms have taken advantage of their long-term customers. Switching is complicated by firms offering a huge array of products at different rates, often with unclear pricing information, so it’s right that the regulator is intervening with the introduction of a single easy access rate.”

Laura Suter, personal finance analyst at investment platform AJ Bell, said the move will still mean that customers need to shop around to get the best rates.

“It’s estimated that cash account customers miss out on £1.1bn in interest by not switching to a better rate, and this fix from the FCA doesn’t solve that.

“It’s likely we’ll see banks competing on introductory rates to draw new customers in – as they do now –and then setting the ‘single easy-access rate’ at the minimum they can get away with before they see an exodus of customers. This is unlikely to mean those that have had accounts for five years or more, and so are least likely to switch, will see a dramatic increase in the money they make on their savings,” she said.

Suter added that the new rules will likely benefit the digital-only providers or newer banks, as they don’t have a massive back-book of legacy business.