Savings rates: Nine big banks face ‘robust’ action if they can’t prove fair value
The nine largest banks have passed on just 28 per cent of base rate increases in easy access savings accounts since the beginning of last year, as the City watchdog issued a new set of rules to ensure savers get a fair deal.
Under new rules coming into place, the Financial Conduct Authority (FCA) said firms will be “required to justify” how their rates offer fair value by the end of August. If they are unable to do so, the FCA will take “robust action”.
The watchdog will also review the timing of firms’ savings rates changes each time there is a base rate change.
Sheldon Mills, executive director of consumers and competition at the FCA, said, “if we see low savings rates – and those rates continue – we will work with the banks and make our views known”.
Mills added that “all our powers are available” to ensure banks are offering fair value, but stressed that the FCA is not a “price regulator”.
Banks have come under immense pressure from politicians and regulators for failing to pass on base rate increases to the £1.5trn savings market, particularly in easy access accounts which make up 60 per cent of balances across the nine largest banks.
These banks are Lloyds, Natwest, HSBC, Santander UK, Barclays, Nationwide, TSB Bank, Virgin Money and the Co-operative Bank.
According to the FCA, these banks had only passed through 28 per cent of the base rate rise to easy access deposits between January 2022 and May 2023.
Between 2004 and 2009 in contrast, banks passed on an average of 80 per cent of base rate increases to easy access accounts, although rates did not increase as quickly as they have in the past 18 months.
While the rate of pass through had accelerated from August last year, Mills said “it needs to speed up, and we will use the consumer duty to ensure that.”
Fixed term accounts saw greater pass through, with nine of the largest banks passing through 51 per cent of the same period.
Smaller firms have been offering much higher rates on average than their larger competitors, with the average rate hitting 3.7 per cent compared to two per cent at the nine largest banks.
Many have suggested that in order to ensure rates are passed through, banks should communicate more proactively with savers to ensure they are getting the best deal. Around £250bn is held in accounts that do not earn any interest, according to the Bank of England.
Harriett Baldwin MP, chair of the Treasury Committee, said the FCA’s action represents more progress. “If the £250bn in savings earning little interest can be made to work harder, it will help with the cost of living and help to tackle inflation,” she said.
When hauled in to the Treasury for a meeting on the subject, the banks reportedly argued that they faced difficulties in communicating with customers due to data protection rules.
In response to these concerns, the watchdog consulted with the Information Commissioner’s Office and confirmed firms are able to contact customers to inform them of products offering higher rates.
Among the other proposals, the FCA said it will analyse the difference between on-sale and off-sale products, challenging firms if the rates on offer do not offer fair value to existing customers.
The FCA will review the effectiveness of firms’ engagement with customers by the end of March 2024 and take action if firms have not effectively delivered the outcomes set out
Mills said: “we want a competitive cash savings market that delivers better deals for savers, where interest rates are reviewed quickly following base rate changes and firms prompt savers to switch to accounts paying higher rates”.
Eric Leenders, managing director of personal finance at UK Finance, said: “Savings rates have increased recently and there are a lot of good accounts on the market – UK banks have passed through a greater proportion of interest rate rises to savers than in other countries.”
“There is a competitive market for savings and we always encourage people to shop around for the account and interest rate best suited to their needs,” Leenders continued.