FCA could introduce a basic savings rate for long term savers

1 August 2018   By Aly Johnson

The Financial Conduct Authority could force banks to have a basic savings rate to help long term cash savers.

The Financial Conduct Authority (FCA) have started discussions on introducing a basic savings rate for long term savers who might otherwise miss out by not shopping around for a better deal.

Typically, the best savings rates are found on introductory deals that once end, leave savings languishing on rates as low as 0.05% per annum. Alternatively, customers are forced to lock savings away in fixed rate deals, something many people are unable to afford to do.

And despite efforts from the FCA in 2016 to get more customers switching, we simply aren't moving our savings enough to benefit from these introductory deals.

savings add to jar
Credit: lovelyday12/Shutterstock.com

Instant access savings

A basic savings rate, if implemented, would apply to instant access savings accounts. Meaning people who can't afford to lock away savings or always save the same amount in a regular savings account, will benefit from a boost to their savings.

It's been reported that 87% of British adults have cash savings, with 80% of that cash instant access accounts.

At present some banks are rewarding their customers with as little as 0.05% interest per year on instant access savings - that's 0.45% less than the Bank of England base rate.

And while today's best paying instant access account offers 1.5% per annum, on average savings in the UK are earning just 0.56% interest each year.

Potential solution

The suggested solution of a basic savings rate would help to ensure a minimum level of interest would be awarded even once introductory deals expire.

The FCA suggests this basic rate would be set by each bank itself, and while it would be a minimum across all the bank's instant access and cash ISA savings, the basic rate could vary between banks.

The FCA, and likely comparison websites like Choose, therefore would publish these basic savings rates to allow customers a direct comparison and stimulate competition in the market.

Banks could still offer introductory incentives, but the basic rate would help to prevent 'zombie' accounts where savings end up being left on incredibly low rates once deals end.

However, as yet there is no early indication of what the basic savings rates are likely to be.

Options for long term savers

In the meantime, to avoid a low rate, customers are encouraged to look around for better deals and interest rates on different products.

  • The highest rates being offered for savers on current accounts are up to 5% per annum.
  • For customers wishing to stick with savings accounts, some regular savings accounts also offer up to a 5% p.a. rate of return currently.
  • Fixed rate savings typically offer the highest rates available, but they may be taxable.
  • Customers seeking a longer term savings option could look at ISAs. Savers can invest up to £15, 240 this tax year and interest earned on the entire balance is tax free.

Switching accounts

The process of switching savings accounts is thought of as being troublesome, but is in fact a relatively simple process. Remember to always read the fine print.

How to switch:

  • When the advertised interest rate (typically a fixed term i.e. a year) is up, the interest rate on that account will revert to the basic rate the provider offers. Set a reminder for when this is, as now is the time to move savings account.
  • Compare the best cash ISA and savings rates available.
  • Decide what type of account is best - instant access or fixed term.
  • Transfer the money over.
  • If the new account is an ISA, arrange with the new provider to transfer the funds from the old account.
  • If the new account is a savings account check with the new provider how the transfer can be done. Some providers allow a BACS transfer, others require a transfer via a current account first.

The future for savers

The FCA is currently seeking feedback from all parties with an interest in cash savings, on the suggested basic savings rate measure. In particular:

  • banks and building societies
  • consumer groups and individual consumers
  • industry groups / trade bodies
  • industry experts and commentators

The FCA will assess the findings when comments close on 25th October 2018.

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