This article first appeared in the Herald on 10 January 2020
The Financial Conduct Authority's interest in long-standing customers who have been worst affected by the loyalty penalty is very welcome.
Banks and building societies need to reward saving behaviour and the FCA should monitor the implementation. Some 40 million people have Single Easy Access Rate (SEAR) for easy access cash savings. But the interest rates offered on many of these accounts have been low because the Bank of England base rate has now been at an unprecedented low for nearly a decade. The current savings market rewards people who have the time and motivation to shop around and take advantage of introductory offers from banks, building societies and credit unions. Savers who leave their money to languish receive lower and lower rates with older savings accounts offering 0.1% interest or less. Citizens Advice calls this “the loyalty penalty”.
The proposed changes still allow competition for customers but at the end of any introductory rate people will not be dumped on to the lowest rates. We also agree that requiring banks to publish clearer information on rates will allow different accounts and providers to be compared and contrasted in a more transparent way.
However, and here comes the “but”, there is a risk profit margins at banks and building societies could be maintained by reducing interest rates for everybody to the lowest common denominator and by hiking up fees and charges elsewhere.
We’re already seeing an example of this with overdrafts. Last year the FCA announced that from April 2020 banks must scrap unarranged overdraft charges, fees and interest rates and charge a single interest rate for both arranged and unarranged overdrafts. In theory, this is good news. The changes will curb the harshest rates and charges for unarranged overdrafts which in some cases are comparatively higher than the Annual Percentage Rate charged by payday lenders.
CAS welcomes the changes because charges tended to be mostly borne by the poorest customers. But by aligning arranged and unarranged overdraft rates, costs are in some cases actually going up for people who have responsibly managed an arranged overdraft until now. A series of banks, including RBS, Nationwide and HSBC, have announced they plan to set their single overdraft rate at 39.9%. For people who regularly use an arranged overdraft, their interest rate is now likely to be higher than those for credit cards and in many cases they risk a doubling of what they are currently paying in interest charges.
So the message here is a cautious welcome with the caveat that standardising interest rates must not trigger a race to the bottom. Banks and building societies need to reward saving behaviour and the FCA should monitor the implementation. In the meantime, comparing and switching savings accounts is the surest way to ensure a rewarding interest rate.