Customers lose out on billions a year as banks take advantage of apathy over savings rates

WHEN James Clarke was sifting through his mother’s assets in the wake of her death earlier this year, he was astonished to discover that she had a savings account containing some £20,000.

It wasn’t so much the amount stashed away that took him by surprise, however. Instead, James, an accountant from Milngavie, was shocked to find that the account was paying just 0.1 per cent on the money.

“As executor, I found that she had only been receiving one tenth of one per cent for about a decade on a savings account in which she had £20,000,” he said.

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Clarke was angered not only by the miniscule interest, but also by Bank of Scotland’s alleged failure to inform his mother when the rate on her account was being reduced.

On complaining to the bank, Clarke was told that his mother had failed to manage her account properly.

In other words, she should have reviewed it every year and changed to a new product if necessary.

“I explained that she would have seen no need to do so as she had assumed that her money was safe with the Bank of Scotland and that she would still have been obtaining an interest rate in line with market conditions,” said Clarke.

“That used to be the way savings accounts and Isas operated – but all this has obviously changed.”

Bank of Scotland said it notifies all savings customers if they are near the end of a bonus period or if a fixed rate product is approaching the end of its term.

“The timing of these mailings varies across the product types but the minimum notice is currently at least two weeks. We inform customers their bonus or fixed term is ending and seek their input for re-investment,” a spokeswoman said. “We also provide details of interest rates for each account online and on all statements so that customers can always find out how much interest their account is earning should they wish to.”

James Clarke’s mother was far from alone in having thousands of pounds of savings in an account in which the interest rate had dwindled to virtually nothing.

UK savers are missing out on some £12 billion a year because they leave their money in accounts paying virtually no interest, consumer group Which? has estimated, with roughly half of all accounts paying 0.5 per cent or less.

At the time of writing, the average easy access savings account offers interest of just 0.21 per cent, falling short not only of inflation but of the record low 0.5 per cent base rate. Yet millions of people are letting banks off the hook by leaving their money in those accounts – and the number of savers wasting money by failing to move it to a more generous account keeps rising.

Banks have taken full advantage of that consumer apathy over the past three years by launching more and more bonus or introductory rates. The best buy savings tables have at times been dominated by these accounts, which usually offer an eye-catching rate for the first year before slashing it thereafter. After the first 12 months most of these accounts go from being among the best paying accounts on the market to offering a rate barely about the bank base rate.

The top bonus account currently on the market is the Post Office’s reward saver. It pays 3 per cent for a year, before dropping to 1.75 per cent. The biggest plunge is on the ING Direct savings account, where the 2.9 per cent interest becomes 0.54 per cent after the first year. Santander and AA Savings both have accounts offering 2.8 per cent that revert to just 0.5 per cent after 12 months.

Providers are counting on consumers either not keeping an eye on the rate they’re being paid or not bothering to switch to a competitive rate once the introductory period comes to an end.

Kevin Mountford, head of banking at Moneysupermarket, said banks are only offering generous deals because they are using bonuses to inflate the headline rate at the outset. “However, banks do rely on savers leaving funds in these accounts long after the rate has dropped. Typically bonus rates last at least 12 months, so savers should take advantage while they are around, but then be prepared to switch again when the bonus expires,” he said.

Bonus accounts are responsible for a growing proportion of consumer gripes about savings products. Most complaints to the Financial Ombudsman Service about savings now concern accounts where the rate has dropped sharply.

A common bone of contention is that many people feel they’ve had insufficient notice of the change.

A bid to make it mandatory for banks to write to customers when their interest rates are cut fell on deaf ears, despite the support of MPs including Menzies Campbell. They also called for customers to be given annual notice of the interest rates being paid on their savings accounts and to provide simple illustrations showing how much money they would earn in each account if they had certain amounts of money in them.

As it stands, banks do have obligations in this area, but they are open to interpretation.

Under the Banking Conduct of Business Sourcebook, which came into force in November 2009, providers must provide reasonable notice “on paper or another durable medium” when making a “material” change in interest rates that will be to the disadvantage of the consumer.

But these are guidelines rather than rules and there’s a grey area over when an interest rate change is considered “material”.

It is supposed to depend on the size of the account balance and the scale of the change in rate. In the absence of more clear rules, however, not to mention the proliferation of bonus accounts, there has been a sharp rise in disputes over the obligations of savings providers in communicating product changes.

James Clarke said: “The bank’s excuse for not sending out letters informing customers is that it would cost too much. A ridiculous reply when you consider that they spend fortunes sending out sales literature.”