The Financial Conduct Authority is considering forcing banks to pay a minimum interest rate to all customers with cash savings accounts, after finding lenders “take advantage” of people’s unwillingness to switch providers in order to pay loyal customers less.
On Wednesday, the UK regulator opened a consultation on price discrimination in the savings market, saying previous efforts to improve competition “did not stimulate sufficient changes in customer behaviour”.
Christopher Woolard, FCA director of strategy and competition, said the organisation was “concerned about the way firms are treating customers”. He added that the regulator’s proposed solution “would promote competition and help get customers a better rate of interest”.
Many lenders offer higher interest rates to attract and retain new customers, while gradually cutting the rates paid to people holding older accounts.
Large stocks of loyal, low-interest deposits also provide a competitive advantage to larger banks by providing a cheap way for them to fund lending, which the FCA said last month had stifled the efforts of smaller “challenger” banks to increase their market share.
The regulator said it would prefer to introduce a “basic savings rate” — a variable minimum interest rate that would come into effect on all easy-access cash savings accounts and Isas, after they had been open for a certain amount of time. It estimated that customers would benefit by about £300m a year in extra interest payments.
Sarah Isted, financial services risk and regulation leader at PwC, said the proposal “would most benefit those who are either unwilling or unable to engage in switching, such as potentially vulnerable customers”.
The FCA is also considering more extreme solutions, including an outright ban on price discrimination in savings accounts, which would force banks to pay all customers the same interest rates on comparable accounts. However, it cautioned on Wednesday that the “unintended consequences of this approach could be significant and may outweigh the intended benefits”, because savings are generally an important source of bank funding.
Wednesday’s intervention was the latest in a series of recent efforts by the FCA to combat retail banking practices that it perceives as unfair. In May, the watchdog called for a “radical” overhaul of the way bank overdrafts work, and an ongoing review of banks’ business models has criticised the way a small number of customers subsidise free-in-credit current accounts for other users.
Ms Isted said that by putting the onus on companies to provide better arrangements instead of making further attempts to change customers’ behaviour, the regulator was “showing that it won’t hold back from taking more radical interventions where it feels this is necessary to ensure that consumers get a fair deal”.
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