Competition in the £700bn cash savings market often does not work well for consumers, particularly those with long-standing accounts, the Financial Conduct Authority (FCA) has found, as it reveals plans to overhaul how the industry works.
The regulator said it should be easier for consumers to compare cash savings accounts and then switch providers – mainly banks – if they wish.
In particular, the FCA found around £160bn of the funds held in easy access savings accounts earned an interest rate equal to or lower than the Bank of England base rate of 0.5% in 2013, yet consumers often find it difficult to know what rate they are on, or are put off switching by the expected inconvenience.
The steps we have proposed today are designed to make the market more dynamic, working in everyone’s interest
Around 80% of easy access accounts have not been switched in the last three years, according to the FCA. Research by the regulator also found that simple changes in the timing and content of communications from firms to customers can significantly increase shopping around.
Balances held in older accounts, which represent a significant proportion of providers’ total savings balances, earn lower interest rates than those in more recently opened accounts, the FCA found.
Consumers receive little information about alternative products and often assume switching accounts will take a lot of effort for limited benefit, the regulator said.
It added that large personal current account providers have considerable advantages over other providers because they can attract most easy access balances despite offering lower interest rates.
The FCA is proposing a number of changes to address these concerns.
It wants providers of cash savings accounts to be more transparent about how reductions in interest rates on variable rate savings accounts are applied the longer a consumer holds the account. This includes displaying prominently the lowest rate of interest any of their customers receives.
Consumers should be given clearer, more timely information to help them compare their savings account with alternative products and know how to switch if they want to do so.
The regulator is not proposing to ban introductory bonus rates because it said they can benefit some customers, but it said it does expect providers to improve the way they communicate interest rate changes and bonus rate expiry to consumers.
The FCA also wants it made easier for consumers to view and manage accounts with different providers in one place, and to switch accounts, so consumers are not put off moving their money to another provider or to another savings account with the same provider.
A reduction in the current 15 day switching time for cash ISAs is also in the regulator’s sights.
The FCA said it does not intend to mandate the specific number or type of products that each provider should offer. However, it said a number of providers have recently simplified their product ranges, and providers that have not yet reviewed their product range should consider whether their current products deliver good outcomes to consumers.
FCA director of strategy and competition Christopher Woolard said: “In a good market firms should be competing to offer the best possible deal and consumers should have the information they need to help them shop around.
“We want to see firms making simple information much easier to find. More also needs to be done to reduce the hassle for consumers to switch their savings. The steps we have proposed today are designed to make the market more dynamic, working in everyone’s interest.”
The FCA is seeking views on its proposals by 18 February 2015, and will use this feedback to inform any future changes to its rules.