FCA: banks should make savings account interest rates clearer and switching easier

Out-Law News | 22 Jan 2015 | 12:19 pm | 3 min. read

Consumers who hold a savings account with a bank or a building society may not be receiving the best available rate of interest, particularly those with the oldest accounts, the Financial Conduct Authority (FCA) has said.

The regulator is consulting until 18 February on new rules that would require providers to give their customers more information about the features of their account, making it easier for them to compare accounts with different providers; and new rules to make the account-switching process easier. However, it is not planning to introduce a blanket ban on 'teaser' interest rates offered to entice new customers into opening an account, as it has concluded that these can benefit some consumers.

"In a good market firms should be competing to offer the best possible deal and consumers should have the information they need to help them shop around," said Christopher Woolard of the FCA. "We want to see firms making simple information much easier to find. More also needs to be done to reduce the hassle for consumers to switch their savings. The steps we have proposed are designed to make the market more dynamic, working in everyone's interest."

The FCA looked at a variety of savings accounts including 'easy access' accounts, notice accounts, fixed term bonds and individual savings accounts (ISAs), as part of a study of the £700 billion cash savings market. It said that it did not intend to force providers to reduce the number of products that they offered, although those that had not already done so should review their product offerings to ensure that these continued to benefit consumers.

Amongst its findings, the FCA said that those with 'easy access' savings accounts, particularly with one of the major banks, tended to have particularly low interest rates. However, its consumer research showed that these savers were either unaware of the rate that they were on or were put off switching by the expected inconvenience. Around £160bn of the funds held in this type of savings account earned interest at the Bank of England base rate of 0.5% or lower in 2013; yet 80% of easy access account holders had not switched provider in the last three years, it said.

A "significant proportion" of the total savings held by UK providers was held in older accounts, and tended to earn interest at lower rates that money in more recently-opened accounts, the FCA said. Again, consumers told the regulator that they were put off switching by the perceived hassle, and that they received very little information about alternative savings products. Additional research conducted by the FCA found that simple changes in the timing and content of communications from firms could significantly increase shopping around.

In its report, the FCA set out a number of potential remedies which it said could improve transparency and make it easier for consumers to compare accounts or switch to a rival provider. This could include more information about how interest rate reductions are applied to variable rate savings accounts the longer a customer holds an account, with the lowest rate of interest that a customer will receive displayed prominently. Providers could be required to display interest rates on any communications that they send to a customer, and to indicate clearly if the rate paid by an account is below the Bank of England's base rate of interest.

To ensure that consumers are made aware of the potential benefits of switching account providers or shopping around for a better deal, the FCA could require provider to include a standardised information panel on customer communications. This 'switching box' could include the customer's current interest rate, details of similar accounts offered by the provider with better benefits, and details of how to switch to an account with the same provider or another provider. Changes could also be made to the switching process itself to make it easier, including a reduction in the current 15-day switching time for cash ISAs, according to the FCA's report.

Financial services regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA's announcement and proposed solutions appeared to "mirror" the regulator's recent approach towards improving competition between current account providers. However, he said that there were other factors that discouraged consumers from switching.

"The FCA has invested heavily in its understanding of behavioural economics and it is therefore surprising that it appears to be focusing on competition between providers as the key driver behind the changes it wants to see," he said. "Other factors will play a significant part in consumers not wishing to change providers, for example consumer inertia or a consumer may want to have their current account with the same provider as their savings account."