The “harm” caused to millions of loyal customers of high street banks who are earning low interest on their savings is likely to have worsened as interest rates have risen, the UK’s chief financial regulator has warned.
The Financial Conduct Authority said it had challenged some banks that had been miserly with their savings rate increases and warned “onerous interventions” would be considered if it concluded its concerns were not being properly addressed.
The official Bank of England base rate is 4.25% after 11 increases in a row, yet the interest offered by some widely held savings accounts are lagging way behind.
In February, MPs on the Treasury committee questioned bosses of the four largest UK banks – Barclays, HSBC, Lloyds and NatWest – about this, and on Thursday the committee’s chair, Harriett Baldwin, said: “The regulator has now given us official confirmation that the UK’s biggest banks are profiting from interest rate rises and that loyal savers are being increasingly harmed.”
Much of the focus has been on instant access accounts. The Barclays Everyday Saver offers only 0.65% interest and Santander Everyday Saver pays 0.7%. Lloyds’ Easy Saver is offering only 0.65% unless a saver has £25,000 or more stashed away.
There are other accounts paying even less: Virgin Money’s Everyday Saver offers just 0.25%.
Last month, MPs on the Treasury committee said: “It is difficult to avoid the conclusion that our biggest banks are taking advantage of their most loyal customers to increase profits and CEO pay.”
In a letter to the committee, the FCA’s chief executive, Nikhil Rathi, said it was standard practice for financial firms to offer better interest to new savers while leaving existing customers on less competitive rates.
He said the regulator saw evidence of this during work it carried out in 2020, adding: “We expect that the harm from this practice (and the loyalty penalty faced by longstanding customers) will have increased as the base rate has risen.”
The FCA’s upcoming “consumer duty”, which will start to come into force from 31 July, would ensure financial firms – including banks, insurers and investment firms – were focused on delivering “good outcomes” for customers, Rathi said. There will be a focus on “the fairness of pricing” for all groups of savers that would challenge some of the current practices and require “a significant cultural shift”, he added.
The MPs asked the FCA what it was doing to ensure the UK’s multibillion-pound savings market – and easy access accounts in particular – were competitive and that banks were not relying on customer inertia to keep interest rates on savings low.
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Rathi said it had been monitoring this, adding: “We have challenged and sought further information from some outlier firms that had made relatively small increases to their variable rate savings products in 2022 and where we saw a material time lag in pass-through to savings products relative to mortgages.”
The regulator has previously looked into the idea of a “single easy access rate” across all UK instant access savings accounts, and Rathi said the FCA was open to revisiting this “or considering other more onerous interventions” if it later concluded the potential ‘loyalty penalty’ harms it iidentified had “not been adequately mitigated”.
Baldwin said that with banks set to release their first-quarter results in the coming weeks, her committee would be monitoring whether firms were “continuing to squeeze profits from their loyal savings customers”.
This article was amended on 21 April 2023 to correct the spelling of Nikhil Rathi’s name in the 10th paragraph
