Banks and building societies may be forced into offering a ‘basic savings rate’ in the near future to help prevent savers falling onto a rock bottom deal.
Anyone offering an easy-access savings account would have to introduce a BSR, the discussion paper from the Financial Conduct Authority proposed.
Some of these accounts currently offer rates as low as 0.01 per cent, with some banks accused of taking advantage of customer inertia to offer only pitiful rates.
According to data from independent website Savings Champion, around 80 per cent of the savings market currently sits in easy-access accounts, with the majority of that likely to be held with a saver’s current account provider.
Poor rates: A large chunk of savers hold cash in old easy-access accounts which pay rates of just 0.01%
This suggests that most savings cash is sat languishing with the big high street providers, many of which slash rates over time.
In 2013, FCA research showed that a third of savers with easy-access accounts had held the money there for at least five years, with nearly half sat there for at least two years.
The report found that the longer money had been festering in these accounts, the lower the rate savers received.
The idea of the BSR is help protect these savers who leave their money in easy-access accounts for years.
Banks and building societies would be free to set their own BSRs, similar to a standard-variable rate on a mortgage, for both normal easy-access accounts and Isa versions.
The BSR would be the same for all customers and wouldn’t vary according to how long the cash had been in the account, how it was opened or how much is held in it.
FCA modelling estimates the BSR would deliver benefits in the form of higher net interest payments to customers ranging between approximately £150million and £480millon (with a central estimate of around £300million) per year in the easy access cash savings market.
To pay for higher rates for longstanding customers, the FCA expects introductory rates to be lower.
The concern will be that savers who do frequently switch to best buys may be penalised with lower rates in the future to make up for inactive savers who don’t and who would fall on to this higher BSR.
Susan Hannums, co-founder of Savings Champion, said: ‘We truly welcome any incentives to improve savers’ interest and certainly any measures to reduce bad practices from the savings providers.
‘For years now providers have slashed rates on savings accounts with little regard for the saver in mind.
‘However, with the providers setting the bar this could actually lead to a lowest common denominator – will the providers play fair when they are given a free rein?
‘The concern that the FCA has that the improved rates on a provider’s back-book may impact a firm’s ability to pay higher introductory interest rates seems less of an issue when looking at the high street, as they rarely offer compelling or competitive rates on their front-book, let alone their back-book, so this move could at least help to boost the rates on offer for the majority of savers.’
Savings balance: In the FCA paper, it shows how much money is held in accounts for more than two years
Sarah Isted, financial services risk and regulation leader at PwC, said: ‘The proposed remedy of a basic savings rate would help to ensure that all consumers receive a fair rate of interest – not just those who shop around.
‘This would most benefit those who are either unwilling or unable to engage in switching, such as potentially vulnerable customers. ‘
The FCA has introduced some measures in recent years to try and stimulate savers into switching.
This includes seven-day switching in Isa transfers and a trial which saw banks publishing details of rates on old accounts.
Earlier in the year, it concluded that these measures hadn’t solved the problem.
The last set of figures, in October 2016, found that the average branch-based closed savings account paid 0.1 per cent, while some paid just 0.01 per cent.
Non-branch-based closed savings accounts paid more on average, at 0.23 per cent, but some paid no interest at all.
Sarah Coles, personal finance analyst, Hargreaves Lansdown: ‘Since 2013 it has been working hard to find a way to protect these savers.
‘It said earlier this year that efforts so far to persuade people to switch haven’t worked. So now it is considering the idea of building a safety net, in the form of the BSR.’
‘This would be good news for people who don’t get round to switching, because the BSR would improve their rate.
‘However, only by a smidgen. According to the calculations in this paper, it would boost it by less than 0.1 per cent, so it’s not going to remove the need for savers to shop around to get a decent rate.’