FCA sheds light on poor savings rates

Cash savings returns have plunged to the lowest level ever recorded after banks and building societies slashed rates on more than 100 accounts last month.

There are a number of factors behind the multiple cuts in easy access and cash Isa savings rates. Picture: Ridofranz
There are a number of factors behind the multiple cuts in easy access and cash Isa savings rates. Picture: Ridofranz

Bank of Scotland and Clydesdale Bank were among those singled out by the City watchdog this week for the pathetic rates of interest paid to long-suffering savers in their easy access and cash Isa accounts.

Rate cuts have now outnumbered rate increases for nine consecutive months, according to Moneyfacts, even though the Bank of England has left the base rate at 0.5 per cent since March 2009. There were just 14 savings rate increases in June, while the 117 rate reductions included cuts of up to 1.3 per cent.

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The cuts have sent the average cash Isa rate down to a new low of 1.14 per cent, while the average five-year fixed rate bond has fallen from 2.54 to 
2 per cent in just one year.

Charlotte Nelson, finance expert at Moneyfacts.co.uk, said: “Despite the Bank of England choosing to keep the base rate static at 0.5 per cent, savers are still faced with the prospect of savings cuts outweighing the number of rate rises in the market, making many wonder when the misery of poor returns will ever end.”

The prospect of interest rates being trimmed to 0.25 per cent next month merely adds to the gloom, although returns have been driven down by various other factors. The decline in savings rates accelerated in 2012 when the government introduced the funding for lending scheme (which gave lenders access to cheaper finance and so reduced their need for savings deposits).

The need to attract savings deposits is set to become even less acute after the Bank of England announced last month that capital adequacy rules are to be loosened, giving banks more cash with which to lend without having to raise funds in the savings accounts market.

Nelson said: “Back in March 2009 the top easy access account paid 3.94 per cent yearly, but today’s savers will be unable to achieve anywhere near such a rate.

“In fact, savers would have to opt to fix for seven years to get the top deal in the market, which at 2.35 per cent is a whopping 1.59 per cent lower.”

Savers may be more concerned with the likelihood that inflation will rise over the coming months. The consumer prices index edged up from 0.3 to 0.5 per cent last month, it was revealed this week, and the combined effect of the Brexit fallout and rising commodity prices is expected to drive it up further.

While most savings accounts offer returns that outstrip inflation – for now at least – huge numbers of savers are effectively paying banks and building societies to hold their money.

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Several easy access accounts pay as little as 0.01 per cent and one, from the Post Office, pays literally nothing, according to new data from the Financial Conduct Authority (FCA).

The figures were published this week in the regulator’s second “sunlight remedy” report, which is aimed at embarrassing firms into improving their savings offerings.

It also highlighted the difference in the rates paid on open accounts and those that are now closed to new savers. M&S Bank, for instance, pays 1.3 per cent to savers in the easy access cash Isa that is still open to new business, but just 0.05 per cent to those in the closed version.

Other providers singled out by the FCA for the paucity of their savings rates include Bank of Scotland (which pays just 0.1 per cent to customers in its closed easy access and cash Isa accounts), Clydesdale (0.1 per cent on both the open and closed versions of its easy access accounts), Royal Bank of Scotland, Halifax and Lloyds.

“Long-standing customers in closed accounts are getting a raw deal with many providers taking advantage,” said Danny Cox, chartered financial planner at Hargreaves Lansdown. “Providers seem perfectly happy to let savings held in closed accounts wither on the vine and in some cases pay no interest at all. This shows the importance of shopping around and switching accounts to make the most of your money.”

Banks are getting away with such poor rates because savers aren’t taking their business elsewhere. But savings providers will from December be have to include a “summary box” on their statements, showing basic information that makes it easier for savers to compare accounts. They will also be obliged to remind customers when their interest rate changes or when an introductory period end.