Should you switch banks before the new year?

The last decade has been a lost one for savers. Until this year, interest rates had been under 1 per cent – and close to zero – for almost 14 years. Unless you had substantial amounts of savings, it was more than likely that if you were earning any interest at all, it wouldn’t amount to more than a few pence.

But conditions have changed rapidly over the last year, with the Bank of England base rate now at 3.5 per cent – 35 times higher than it was just 13 months ago. As a result, some banks are now offering savings rates of more than 5 per cent.

Fifteen years ago, when Bank of England rates were last at this kind of level, it wasn’t uncommon for banks to pay you interest on any money you kept in your bank account. But during the low interest rate years, banks began to scrap credit interest altogether.

When base rates were at 0.1 per cent, this was perhaps defensible. But as rates have risen over the past year, banks have left their current account interest rates unchanged.

Our own data shows that 85 per cent of bank accounts currently pay no interest at all.

When it comes to savings accounts, things are not much better – at least amongst the big high street banks. All of the big 5 – Santander, Lloyds, HSBC, Barclays and Natwest – have easy access accounts paying between 0.5 per cent and 0.65 per cent.

The story of course is not the same when it comes to mortgages. On that side of the business, standard variable rates are now all over 6 per cent, with Santander topping the league table amongst the big 5 with an SVR of 6.75 per cent – almost twice the Bank of England rate.

What this means of course is that banks have used the rise in interest rates as a payday for their shareholders at the expense of their customers. Mortgage borrowers are being squeezed while savers are being shortchanged. And while there are good savings rates to be found out there – you’ll need to be proactive. If your money is languishing in an old account and you’ve assumed that banks have been ratcheting up your rate as Bank of England rates have risen – think again.

Apart from the cynicism of squeezing your customers at a time when they are already taking it from all sides, I’ve been wondering whether the banks who are engaging in this practice are actually on the right side of regulations.

Next year, a new set of rules – rather grandly known as the “Consumer Duty” – come into force. The essence of these is that all financial services firms have to prove they are delivering good outcomes for their customers. And wrapped up within that over-arching challenge is a requirement to prove they are offering “fair value”.

I think banks will struggle to make a reasonable case that it is “fair” to continue paying their current account customers nothing after bank rates have increased by 3400 per cent. Likewise, easy access savings accounts paying just 0.5 per cent are also hard to justify.

The new rules don’t come into force until July 2023 – but banks are already under pressure from the regulator to explain how they are going to meet them. There will surely be some difficult conversations going on in the boardroom.

If banks don’t sharpen up their act, let’s hope the regulator steps in and reminds them of their new obligations.

In the meantime, there’s never been a better time to review who your savings are with. There are some great deals out there.

If you’re thinking about switching your current account, there are many accounts paying interest. But both Virgin Money and Santander have accounts that pay over 2 per cent. However, it may be worth waiting until the New Year if you’re thinking of switching banks. Most of the cash switching incentives have been withdrawn in the run-up to Christmas (other than First Direct’s £175). These should start appearing again in January – with some banks offering as much as £200 to switch.

Stay savvy. Merry Christmas.

James Daley is the managing director of the consumer group Fairer Finance