BANKS and building societies could be forced to pay a minimum interest rate to customers in easy access accounts amid concern that loyal savers are treated unfairly.
The interest paid to longstanding customers on easy access accounts is generally lower than the interest paid to savers who shop around and the Financial Conduct Authority (FCA), the finance industry regulator, is keen to address the harm caused by such price discrimination.
The problem is particularly acute at some of the big high-street names. For example, Santander’s Everyday Saver, which is open to new customers, pays interest of 0.25 per cent, but the bank’s Instant Saver, which is now closed, pays only 0.10%.
Susan Hannums, co-founder of Savings Champion, the independent savings advice site, said: “For years now, providers have slashed rates on savings accounts with little regard for the saver.
“The average rate for closed accounts is now 0.48% and with some live accounts paying as low as 0.05%, it’s a truly shocking state.
“With around 80% of the savings market currently sitting in easy access accounts and the majority of that likely to be still held with a current account provider, it’s clear that most of this money is sat languishing with the high street.”
To tackle unfair price discrimination, the FCA has proposed a basic savings rate on easy access accounts and easy access Isas that have been open for at least a year. In other words, customers could be sure the interest on their accounts would never fall below a minimum level, which would be set by the bank or building society.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Providers can take advantage of high levels of customer inaction to pay lower interest rates to longstanding customers. While many customers have valid reasons for not shopping around, providers must still treat them fairly, while maintaining competitive rates for those who do.”
Almost 90% of UK adults have cash savings and a basic savings rate could potentially boost the interest paid to loyal customers.
How much of a boost it would provide would be up to the providers themselves and, according to Hargreaves Lansdown personal finance analyst Sarah Coles, would be unlikely to be high.
“Apathy is the saver’s enemy, and the FCA research has found that the longer savings are left in easy access accounts, the lower the interest rate they tend to receive,” she said.
“A basic savings rate would be good news for people who don’t get around to switching, because it would improve their rate. However, only by a smidgen. According to the calculations in the FCA paper, it would boost it by less than 0.1%.”
Rate chasers would also pay the price because the banks could cut the rates on new accounts in order to meet the cost of lifting the rate for longstanding savers. Some experts fear a basic savings rate could even discourage switching.
Hannums said: “The fear is that with the introduction of a basic savings rate, savers may be lulled into a false sense of security and be even less compelled to switch accounts.”
The benefits of switching accounts are clear. For example, HSBC’s Flexible Saver pays interest of just 0.05%. If you deposited £50,000 in the account, you would therefore earn interest of £25 a year. Switching to Birmingham Midshires, one of the best unrestricted easy access accounts, would boost the interest to 1.35%, or £675 – a difference of £650 a year, according to Savings Champion.
Shakila Hashmi, head of money at price comparison site Compare the Market, said: “People should still be looking to switch their savings from low interest rate products, to those which will make your savings work harder.
“Whilst we are in a low interest rate environment, there are still some competitive account offers available on the market. It is worth regularly reviewing your accounts to see if you could get a better deal, or interest rate, elsewhere.”
It is also worth bearing in mind that the proposed basic savings rate would apply only to easy access accounts. Savers can already earn higher rates of interest if they are prepared to tie up their money in a fixed-rate bond. For example, you can earn just over 2% in a one-year bond and about 2.7% in a five-year deal.
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