Banks will have to justify why they’re offering low interest rates under new rules
Banks will need to justify offering low savings rates by the end of August.
The City regulator says the new measures are designed to ensure higher interest rates are passed on to consumers – rather than used to bulk up bank profits.
Despite interest rates standing at 5% – a 15-year high – analysis from the Financial Conduct Authority (FCA) found that savers weren’t feeling the full benefit of recent increases to the Bank of England’s base rate.
Nine of the biggest savings providers only passed an average of 28% of rate rises to customers with easy access deposit accounts between January 2022 and May 2023.
But the situation was slightly better for fixed-term accounts, with roughly 50% of the increase in the Bank’s base rate trickling down to savers.
Smaller firms tended to offer higher rates compared with larger competitors.
The FCA has warned it will “take action” against banks, building societies and credit unions that cannot provide a justification for low interest rates.
Firms are also being told to “step up” communications with customers about their savings options, and to measure the effectiveness of the communications.
This should include prompting savers receiving low interest rates, or no interest at all, to consider alternatives.
Savings providers can communicate with customers even if they have opted out of marketing, according to clarification sought from the Information Commissioner’s Office by the FCA.
Reviews of the effectiveness of firms’ engagement with customers will be conducted by the FCA by the end of March 2024.
After each interest rate hike, the watchdog has also said it will review when and if savings rates change.
Interest rates have risen 13 times in a row since December 2021, in an effort to bring down inflation from the current 7.9% to 2%.
The Bank of England is expected to raise the rate again on Thursday, to 5.25%.
Higher savings rates are a key part of the Bank of England’s fight against inflation. Less money being spent in the economy means less likelihood of price rises. A higher return on deposits encourages consumers to put money in savings accounts.
Analysis of easy access savings rates will be published by the FCA every six months – listing what’s on offer from best to worst.
Work will also be done to assess how cash saving accounts are impacting each provider’s profitability.
“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,” said Sheldon Mills, the FCA’s executive director of consumers and competition.
“We welcome the progress that has been made so far but this needs to speed up.”