8th July 2014
Banks are able to get away with paying lower rates of interest on savings accounts because many customers do not shop around enough says research from the financial watchdog.
The interim findings from the Financial Conduct Authority’s (FCA) research indicate that because many consumers do not shop around, banks are able to pay lower interest rates to customers that have stayed with the same account for a number of years.
The FCA also suggests that the largest personal current account providers are able to attract a large proportion of easy-access deposits despite offering lower rates.
Christopher Woolard, director of policy, risk and research at the FCA, says: “Our preliminary view is that while some aspects of the cash savings market are working well, competition does not appear to be working in the interest of many consumers.
“In this market there is a minority of very active, very engaged consumers who regularly change provider to get the best deal. We want to look more closely at what is inhibiting the majority of consumers from getting better deals.”
The FCA says that with such studies it is looking to find a market in which informed consumers are able and willing to take advantage of the best products for them, with firms actively competing to win business by improving the products they offer.
The FCA will now undertake further research before deciding whether it should intervene to ensure competition is working in the interests of consumers. As well as considering the feedback to its initial findings, the FCA will look at the extent to which it might be able to promote greater consumer engagement.
Kevin Mountford, head of banking at MoneySuperMarket says the issue extends further than just teaser rates which woo savers in with a generous rate and then cut them back subsequently. He says: “Savers have been hit hard over the last couple of years, with rates hitting rock bottom, inflation soaring and a real lack of competition in the market. Many providers have used teaser rates to inflate the headline rates on savings, which is not necessarily a bad thing at a time when rates are very low, as savers have benefited from higher rates than they would have normally received.
“However, once these rates drop off their accounts, customers have found themselves on poorer deals. In addition, transparency on rates and the fact many providers often don’t alert customers to the fact that their introductory rate has expired, has left many people languishing on low rates without even realising it.
“It is not just a problem that occurs on accounts with ‘teaser rates’ though, as most savings rates fall over time so it is vitally important that savers keep an eye on the rates on offer and are prepared to switch to a better deal in order to keep the banks on their toes. If people regularly switch then it will put the onus on banks and building societies to offer better deals across the board.”
The FCA says it will consider several further questions before deciding on whether to take further action.
What could be done to ensure that more consumers are aware of the rates they receive and the rates on offer on other accounts?
What information customers are given when rates are changing?
Whether it is possible to give consumers greater insight into how their interest rate is likely to evolve over time, especially after any introductory offer ends, so that they can make an informed medium- term choice between providers when opening an account
What could be done to make it easier to move savings to a new provider
Whether other interventions may be necessary to improve outcomes for customers overall.
The final report into cash savings will be published later this year.