Loyal savers being exploited
A study into the cash savings market suggests savers don’t shop around enough leaving providers free to pay paltry rates.
Savers are missing out on the best returns because they stick with the same account for years and don’t shop around when their interest rate falls.
That’s according to the Financial Conduct Authority which has published the interim findings of its market study into the UK cash savings market.
The regulator launched the investigation in October last year amid concerns over competition in the £1 trillion sector.
Since then it has been looking at how savers engage with accounts, how firms compete and supply different products and what barriers to entry and expansion challenger providers face.
Early findings
The evidence so far suggests some aspects of the sector run well, but competition on the whole does not appear to be working in the interest of the majority of savers.
Data has revealed that banks and building societies pay lower interest rates on older accounts because most savers don't move onto a better deal.
Providers were on average paying a rate of 0.8% for accounts opened in 2012 and 2013, but the equivalent rate on accounts opened five years ago was less than 0.3%.
The FCA said another barrier to savers getting a better deal was the advantage major current account providers held.
Over 80% of the total balances in easy access accounts were held by people who also had a current account with the same provider.
These big providers could offer 'materially' lower rates compared to small providers thanks to customers preferring to manage accounts in the same place.
Leading current account providers on average offered a return of 0.5% for their easy access accounts opened in the last two years, but rival providers offered 1.2% on average.
The FCA says the high level of balances held by current account providers and the reluctance of savers to shop around could be a barrier to competition from challenger banks.
Bonus rates
The regulator also had concerns about ‘teaser rate’ products, which offer a bonus introductory rate to new customers for a temporary period before dropping off.
These sorts of savings accounts are in decline. Only 5% of accounts offered bonus rates in November 2013 compared to 9% in October 2011. But the FCA said nearly half of the total easy access balances in the report are held in accounts which offer, or in the past have offered, bonus rates.
Some groups believe these deals exploit inertia in savers who don't move their money once their interest rate drops. But the FCA acknowledged bonus rates were common in many markets and could in fact encourage switching.
The regulator said it will look at what could be done to ensure more savers were aware of the rates their savings were on and would consider how information was displayed when the rate was changing.
It also wants to explore if it’s possible to give savers a better insight into how their interest rate will change over time.
Next steps
So far the investigation has been focused on easy access accounts and no-term Cash ISA accounts, but the full report will cover other cash savings accounts.
The FCA will continue its investigation before deciding whether to intervene to ensure competition is working in the interests of savers.
Christopher Woolard, director of policy, risk and research at the FCA, said: “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 regulator is inviting feedback on its initial findings which must be submitted by 8th August 2014 and is looking at how to promote greater engagement with cash savings deals.
The final market study report into the UK cash savings market and its recommendations will be published later this year.
What do you think? Are banks exploiting loyal savers? Or is it our own fault for being apathetic about the interest our money is earning?
More on savings:
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The best fixed rate savings accounts
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