Crackdown on ‘broken’ savings market could hand consumers £260m

We’re a nation of savers. Three quarters of us have an easy access savings account, including tax-efficient ISAs. As the new year takes hold, there’s a new drive to up our cash savings game with the best interest rates on offer.

Comparing the huge range of deals and features on offer is almost impossible as banks hide behind an array of details, conditions, and quiet, sudden drops in rates.

The result? An uncompetitive market that doesn’t even reward savers with a better-than-inflation interest rate on average, essentially meaning consumers are paying for the privilege. Some accounts out there – resolutely marketed as savings products – pay just 0.01 per cent in interest.

The average easy access rate has now dropped to its lowest point since 2018, research by Moneyfacts suggests. The average gross return for a hefty deposit of £10,000 today is 0.59 per cent, down from 0.64 per cent a year ago.

Several providers have made rate reductions on easy access accounts over the past year – including products that had been lucrative market-leaders from providers like Virgin Money and Marcus.

In response, the Financial Conduct Authority (FCA) has announced savings providers will be required to offer customers a single easy access rate (Sear) 12 months after they opened the account, which should mean that savers are more than £260m a year better off in interest.

“The plans from the regulator would be a dramatic change to the cash savings market and will mean banks can’t hide behind a vast array of different interest rates for cash accounts, depending on how long ago you opened the account, whether it’s run online or in branch and what branding the account has been given,” says Laura Suter, personal finance analyst at investment platform AJ Bell.

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The new rules will make it much simpler for customers to find the rate they are being paid, and to then compare that figure to what they could get elsewhere. It also means customers of the same bank with multiple accounts won’t find they are being paid a range of different interest rates.

“Banks will also no longer be able to quietly ratchet down interest rates they pay on cash savings over time, in the hope that customers won’t notice,” adds Suter.

“This means that the most vulnerable customers, who aren’t as likely to shop around, should get a better deal. Hopefully the ‘cliff-edge’ effect of the interest rate reducing after the initial 12-month offer period will spur more people into action to switch to a better rate.”

However, it’s unclear what is stopping providers simply offering even lower rates of interest to start with in a bid to maintain margins.

And customers will still have to shop around for the best rates, which they still don’t do, despite heavy investment in simplifying and encouraging such actions.

Fewer than half of easy access ISAs and only a third of easy access savings accounts have been switched in the last five years.

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Cash account customers currently miss out on an estimated £1.1bn in interest by not switching to a better rate, and this fix won’t solve that.

“Loyalty should of course be rewarded, but this doesn’t seem to be the case when it comes to the easy access market,” says Rachel Springall, finance specialist at Moneyfacts.

“All major UK lenders passed the most recent Bank of England stress tests too, so consumers will feel their cash is safe with them – even if they are not getting the best possible return on their investment.

“Providers are unlikely to offer generous interest rates right now with the current economic and political climate, so they could even be cutting rates to deter investors so that they don’t become too cash flushed.

“Economic uncertainties remain in the market and if interest rates were to be cut by the Bank of England, then it is the easy access market that typically worsens the soonest as these deals pay a variable rate. If providers are getting too much demand, then they could even pull their accounts altogether.

“Now is not the time for savers to be apathetic in switching deals as they could be missing out on a decent return on their nest egg,” Springall warns. “Especially if their cash is with a high street bank. It is important that consumers spare some time to compare rates regularly and take their loyalty elsewhere if they are getting a raw deal.”