So-called 'teaser' savings rates that end after a year are to be investigated by the Financial Conduct Authority. But are they really the big issue for savers?
The Financial Conduct Authority (FCA), the financial regulator and successor to the Financial Services Authority, has announced it is to carry out a market study on the savings market.
One particular area of interest is the use of ‘teaser rates’ – in other words, savings accounts that offer a bonus interest rate at first, before the rate typically plummets.
It also wants to examine how often savers switch their accounts.
As Martin Wheatley, chief executive of the FCA, noted: “We know that switching rates are low for financial services products and savings accounts are no exception. Even when people do switch their accounts, they are twice as likely to go with their existing provider than move to the offering of a competitor.”
The trouble with teaser rates
Let’s start with the one big area the FCA is already targeting: teaser rates. These have long been a controversial subject in the savings market.
And let’s use a real life example that’s currently available: the Post Office Online Saver, which you can open with just £1. It pays a rate of 1.50%. Now that’s not exactly the sort of interest rate that gets my heart racing, but it’s relatively competitive in the current easy access savings market.
However, there is a definite point when the Online Saver becomes less competitive, and that's in 12 months’ time.
That’s because the account pays a bonus of 0.60% for a year. On the one hand, you know that you’ll never face a rate lower than 0.60% within the first year. But you also know that once that bonus is gone, the return you’ll get on your cash will crash.
[SPOTLIGHT]Opponents of the use of these bonuses say this is a way that banks and building societies trap innocent savers. They dupe us, luring us in with the prospect of a juicy rate on our money, only to cut that rate later on, leaving us at the mercy of their mediocre savings rates.
But that’s a load of old cobblers really, isn’t it?
Bonus rates aren’t a secret
If you are about to open a savings account, you should actually do a little research first. And if you do, it’s pretty difficult to miss whether the rate you enjoy is being boosted by a bonus rate. It doesn’t tend to be hidden away in tiny text at the end of the small print.
As a result, when you open that account, you should know full well that the rate is only being boosted for a certain period of time. It’s then up to you to keep on top of when that rate falls, just as you would need to with a credit card coming to the end of its interest-free period, or a fixed rate on your mortgage coming to an end.
It shouldn’t come as some unpleasant shock that your savings rate falls. It’s perverse to blame banks and building societies for doing something that they’ve warned us will take place from the outset.
But that relies on us being engaged and hands on with our money. Which brings us to the second area the FCA is looking at – how rarely we actually switch savings accounts.
We need to take more responsibility
The FCA knows full well that the vast majority of savers find a savings account, stick their cash in it, and then forget about it for a couple of years. It's only when they eventually bring themselves to actually look at a statement and realise they have earned a pittance in interest that they think about switching.
Our own research tells a similar story. In a reader survey carried out this year, more than 30% of respondents said they rarely move their savings. Worryingly, 14% said they never switch. And these are people engaged enough that they read a money website – imagine how those percentages grow among people who don’t really take an interest.
Now, if we were all a little bit more engaged with our cash and the return it was getting, bonus rates wouldn’t be an issue. We’d make a note of when the bonus came to an end and then shop around for a new deal, just as we do with other products.
It’s that apathy the FCA really needs to investigate. How can it get people more engaged with their money? How can it get them to actually check what interest rate their cash is earning more regularly?
Maybe it’s a pipedream. Perhaps we will never get the majority of Brits to take an active interest in what’s happening to their money. But, to me, that seems a far more sensible aspiration than discouraging savings providers from offering half-decent interest rates, even if they are just for a relatively short period of time.
What do you think about bonus rates? Is the industry duping us, or do they have their place? Let us know in the Comments box below.