15th September 2013
The chief financial regulator Martin Wheatley certainly has a colourful vocabulary when it comes to describing savings accounts which are not working to his satisfaction writes John Lappin.
In his first speech against teaser rates on bank accounts, back in the spring, the Chief Executive of the Financial Conduct Authority mentioned venus fly traps and frogs boiling in water as website Outlaw reported.
The unfortunate amphibians or insects were savers lured into savings plans particularly cash Isas by generous rates in year one only to see them plummet in subsequent years.
Last week, the regulator announced an inquiry into the practice, as reported in the Guardian, which may be followed by regulatory action.
At Mindful Money we think this inquiry is timely. Certainly banks and building societies have been guilty of some rather unpleasant behaviour on this matter in the past. Those who suffer of course are those who do not monitor their savings in any great detail. In years two or three inflation, which has been at least stubbornly medium for the last few years – is sure to take a significant bite out of their money. The result could be very unfair to a long standing but perhaps very elderly customer who may not notice the change in terms.
However, we wonder how challenging the FCA will find this task.
Many savings providers have played a bit of a game on rates to get to the top of those all important best buy tables in year one. In getting to the top, some banks and building societies will be offering loss leading rates or at least cutting back their profit margins significantly.
It all gets a little complicated because to really calculate how important this money is to a bank, you also have to understand that it also helps them to fund and back with capital other activities such as mortgage and business lending.
Savers themselves don’t need to worry too much about this, but a big regulatory intervention could lead to a more vanilla market i.e. if the worst rates have to be more generous due to a regulatory order, the best rates will presumably get significantly less generous. Accounts might start to look a lot more similar, if the regulator sets boundaries of acceptable behaviour or even dictates the amount a rate could fall by in subsequent years, though this is probably at the very highest order of intervention.
If it only demands better information for customers when an account gets to its first or second anniversary, then we think it will only alert a small proportion of savers.
It would be nice to think that banks and societies would offer reasonable rates in year two, three and four because to do otherwise would hurt their reputation. But inertia suggests this is not the case. Perhaps they don’t believe their reputation can fall any further.
The ideal would be to create a market that was still competitive and dynamic but that also played fair with all customers. We wish the regulator well with finding that sweet spot.
However the blunt truth is that if one group – the many customers who don’t notice the change in rate – are helped, then another group – those astute switchers may suffer.
The reality is that all savers are struggling to get a decent rate – a grim situation highlighted by one of Mindful Money’s regulator contributors SavingsChampion’s Anna Bowes in the last few days.
The message to savers as always is stay on your toes. read the small print, but especially check on the rate, so you don’t have to rely on the regulator to rescue your savings from the boiling pot or some nasty fly eating plant.