Doubt cast over easy access savings account reforms

Out-Law News | 13 Jan 2020 | 2:23 pm | 1 min. read

UK banks should explore how technology could be used to improve consumer outcomes in the cash savings market to mitigate the impact of proposed new restrictions being imposed on their freedom to set interest rates for easy access accounts, an expert in financial services regulation has said.

Lauren McCarthy of Pinsent Masons, the law firm behind Out-Law, was commenting after the Financial Conduct Authority (FCA) outlined plans aimed at preventing banks from lowering interest rates for longstanding holders of easy access savings accounts or easy access cash ISAs.

The central proposal set out by the FCA is that firms providing cash savings products be required to apply a single easy access rate (SEAR) to their products no later than one day on from the first year anniversary those accounts were opened.

According to the FCA, while firms in the market compete "vigorously" for customers that are taking out a new product in the easy access cash savings market, there are fewer competitive pressures for longstanding customers with existing savings accounts. The impact of this is that firms are "able to reduce interest rates to them over time".

The introduction of a SEAR means firms will remain free to compete over the introductory rates they offer to new customers, but then be obliged to transfer easy access saver customers onto the SEAR after the one year long introductory rates expire, unless customers elect to switch to a new provider.

Firms will be obliged to publish data on the SEARs they offer for their products – one for easyaccess cash savings products and one for easy access cash ISA products – so that customers can see more clearly the different rates on offer across providers.

The FCA said it is likely that its proposals, which are open to consultation until 9 April, will lead firms to set their SEARs at "higher than the current rates offered to longstanding customers".

The proposed reforms come after the FCA issued a discussion paper in 2018 in which it explored options for addressing price discrimination in the cash savings market. Price discrimination in the market was identified in a 2015 report published by the FCA which followed a market study it carried out. The FCA decided against requiring providers to offer all customers the same interest rate at that time.

McCarthy said: "The FCA’s proposals follow a long line of remedies implemented in the banking and finance industry over the past years that have focused on improving customer outcomes as well as combatting competition issues. As already flagged by industry bodies, including the Building Societies Association and UK Finance, there is some doubt about whether these additional remedies will really lead to good customer outcomes and if so, at what cost."

"In responding to the consultation, firms should consider what alternative solutions may address the FCA’s concerns, such as those presented by open banking technology and new fintech providers," she said.