The UK Financial Conduct Authority (FCA) has launched a consultation on the competition for savings and ISA accounts. The FCA has previously raised concerns regarding interest rates paid to consumers who tend to remain with a financial institution even though their money may generate a higher rate of return with another. The FCA first published a study on cash savings in January 2015.
To help facilitate more competition in the cash savings market, the FCA is proposing new rules that will establsih a “single easy access rate”(SEAR) across accounts. The regulator states that firms will “have [the] flexibility to offer multiple introductory rates for up to 12 months, then they will need to choose one SEAR for their easy access cash savings accounts, and one for their easy access cash savings ISAs.”
The proposed change may impact up to 40 million consumers who hold cash accounts. The FCA estimates that consumers will benefit by £260 million from higher interest payments.
FCA Executive Director of Strategy & Competition Christopher Woolard said that competition is not working well with these cash accounts and their proposal will boost competition and require financial institutions to clearly publish rates paid to these consumers:
‘This will prevent firms from gradually reducing interest rates over time and make them compete for all their customers. We are concerned that many longstanding customers are seeing a poor outcome and we want firms to focus more on these customers. The new rate will also make it easier for savers to know whether they are getting a good deal after any introductory offer has expired,” said Woolard.
Some institutions have leveraged a bait and switch ploy to lure customers in. A higher interest rate may be initially promised but the rate is lowered at some point in the future as consumers become complacent. The FCA expects that requiring firms to set a SEAR initially will eliminate this interest rate trap for longstanding customers.
The SEAR proposal will require firms to publish data every 6 months on the rates they offer. Awareness and transparency will help to encourage customers to move their money elsewhere when higher rates are available.
The FCA said the proposals are limited to easy access savings accounts because this is where they found harm in the cash savings market study.
The proposal may benefit Fintechs that may be able to offer a higher rate of return due to lower overhead and infrastructure costs. One Fintech that has leveraged interest rate disparities is Raisin, a marketplace for savings accounts that allows consumers to easily surf and select higher savings rates regardless of geography.
The FCA is now seeking feedback on the proposals set out in this Consultation Paper, by 9 April 2020.
FCA Introducing a Single Easy Access Rate for Cash Savings Consultation January 2020