Could a Basic Savings Rate end the loyalty trap?

There’s potentially encouraging news for savers with banks and building societies that pay better interest rates to new customers than to those who have been with them for years.

Last year, the Financial Conduct Authority (FCA) published a discussion paper ‘Price discrimination in the cash savings market’ (DP18/6, July 2018) proposing the introduction of a “Basic Savings Rate” (BSR), a minimum rate that banks and building societies would have to pay to personal savings customers with easy access cash savings accounts and easy access cash ISA accounts after a set period of time.

This initiative aims to tackle a longstanding competitive problem in the savings industry. Many savings account providers compete to win new business by launching new accounts paying eye-catching rates of interest. These rates might be buoyed by an introductory bonus that only applies for a limited period. Or they might simply be reduced arbitrarily after a set time. But once savers have deposited their money, many don’t keep an eye on what they’re earning and end up in what become uncompetitive products with lower interest rates than those who shop around and switch products – even when their provider launches its next round of eye-catching deals to capture more customers.

As part of their 2015 Cash Savings Market Study (CSMS), the FCA subsequently published a series of reports over an 18 month period at 6 monthly intervals, which involved publishing comparative interest rate information showing the lowest possible rate consumers could be earning on open and closed easy access cash savings accounts and easy access cash ISAs. In their research, the FCA found that some savings providers were paying as little as 0.05% a year, and a couple of providers were paying no interest at all. *

If a BSR is introduced, banks and building societies would be required to apply a single interest rate to all easy access cash savings accounts and to all easy access cash ISAs which have been open for a set period of time (for example, 12 months). Whilst the proposal is that firms would decide the level of their own BSR and would be able to vary it, they’d be incentivised to offer higher rates than they have historically to the long term customers, in an effort to retain more recently acquired customers.

The FCA do, however recognise that there could be a disadvantage to this approach. If a BSR was introduced at 12 months, some customers may lose out in the short term as the BSR may be lower than the rates that bank and building societies currently apply on accounts of around this age.

So, is the BSR the answer to the loyalty trap in the savings industry? Well, Aldermore’s Head of Savings, Ewan Edwards, thinks it’s certainly a move in the right direction.

“The FCA consultation is a good step forward in ensuring that consumers can get the best possible rates on their savings,” he says.

“While we always encourage consumers to shop around, at Aldermore existing savings customers in accounts that are no longer available to new customers receive at least the same rate that we offer to new customers in equivalent current issue savings accounts. We don’t provide exclusive offers to bring new customers in. We’ll be monitoring how this consultation develops and will continue to work hard on behalf of our customers to offer our most competitive rates and products going forward.”

Find out more about Aldermore’s range of savings accounts

*Sources: Sunlight remedy first report - sunlight-remedy

Sunlight remedy second report - remedy-second-report

Sunlight remedy third report - remedy-third-report