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FCA: Competition “not working well” in cash savings market

Longstanding customers are not being rewarded for their loyalty in the cash savings market, while providers often take advantage of the trend for customer inertia, the Financial Conduct Authority (FCA) has warned.

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In a discussion paper published today (July 25), the regulator said providers often differentiate the interest rates they offer different consumer groups based on how sensitive consumer groups are to interest rate changes.


This means longstanding customers can lose out through receiving lower interest rates than more active customers who shop around and switch. This, the FCA said, disadvantages those consumers who do not shop around and who may have stayed with their provider due to loyalty or convenience.


The discussion paper seeks input on how to address the harm caused by this price discrimination. Around 87 percent of UK adults have cash savings, the regulator said, adding it found that customers are put off switching by the expected difficulty.


In the paper, the FCA set out a range of options to address issues faced by longstanding customers including introducing a basic savings rate.


The basic savings rate would apply to all easy-access cash saving accounts and easy-access cash ISAs after they have been open for a set period of time, such as a year, the FCA proposed. Individual providers could decide the level of their basic savings rate and would be able to vary it. Providers would remain able to offer different interest rates to customers in the period before the BSR applies.


Alternatively, a superseded accounts rule has been put forward. Under that rule, providers would be forced to transfer customer deposits to a comparable, on-sale product when their cash savings product has been superseded.

A third option is a ratio-based price regulation, which would act to ensure that the differences between interest rates paid to new customers and those paid to longstanding customers are not excessive. This means that the relative price differential between the front- and back-book customers could not exceed a certain level.


Finally, the regulator has proposed a complete price discrimination ban on easy access cash savings products. This would involve firms being required to offer single interest rates for all easy access cash savings accounts and easy access cash ISAs, irrespective of the length of time the account has been open.


Around 87 percent of UK adults have cash savings, the regulator said, adding it found that customers are put off switching by the expected difficulty.


The FCA is now seeking feedback on the options set out in the discussion paper, which closes on the 25 October 2018.


Christopher Woolard, executive director of strategy and competition at the FCA said: “Providers can take advantage of high levels of customer inaction to pay lower interest rates to longstanding customers. While many customers have valid reasons for not shopping around, providers must still treat them fairly, while maintaining competitive rates for those who do.


“Efforts to encourage customers to switch have had limited impact and we remain concerned about the way firms are treating customers. This is why we are considering the introduction of a basic savings rate for older accounts, which would promote competition and help get customers a better rate of interest.”

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