The Financial Conduct Authority (FCA) has recently issued a discussion paper on whether it should introduce a Basic Savings Rate (BSR) in order to support those savers who leave their money sitting in an easy access savings account.
For all those consumers with an easy access savings account, they would be offered an introductory rate for a specific period, and once that time had passed, they would be automatically transferred onto the BSR. Banks would be able to set their own BSR, but it would have to be same for their entire customer portfolio, without taking into consideration how long the money had been in the account, how much was in the account, whether the customer had another product with the bank, or whether the account was operated online or in a branch.
In bringing together inactive savers and those who are willing to switch every few years, the FCA suggested that banks would need to offer higher rates on the BSR than what is currently offered to long-term savers.
The regulator has estimated that easy access rates would be an average of 0.084% higher, and expects introductory rates to be lower to pay for higher rates for older customers.
Hargreaves Lansdown personal finance analyst Sarah Coles said: “Apathy is the saver’s enemy, and the FCA research has found that the longer savings are left in easy access accounts, the lower the interest rate they tend to receive.”
Coles further stated that the FCA has been “working hard” to find a better way to protect long-term savings customers since 2013, but its efforts to persuade consumers to switch have failed, resulting in the regulator considering the introduction of the BSR, its “safety net”.
“This would be good news for people who don’t get round to switching, because the BSR would improve their rate. However, only by a smidgen. According to the calculations in this paper, it would boost it by less than 0.1%, so it’s not going to remove the need for savers to shop around to get a decent rate,” she added.
“This change will also come at a cost - and the price will be paid by more active rate chasers. The FCA expects banks to cut the introductory rates in order to pay for higher rates for those who hold accounts for longer periods. This will make switching even more important for those who want the best rates.
“It’s also worth bearing in mind that this option only relates to easy access accounts. They currently dominate the savings market – and take around three quarters of all savings cash, but for many people they do not hold the answer for all their savings needs. Savers should take a portfolio approach to their cash. After they have 3-6 months’ worth of expenses in an emergency savings account, they can consider tying up other savings for longer periods, in return for a higher savings rate. These fixed rate accounts wouldn’t be affected at all by a Basic Savings rate, so those fixing for two years, for example, would still get the same rate for those two years.”
Coles concluded that challenger banks will feel the impact of the BSR “less forcefully”, as it they tend not to have as large a consumer base.
“Already bigger is not necessarily better when it comes to savings, because the high street banks rarely feature high up the best buy tables. However, if the Basic Savings rate sees the light of day, it’s likely to mean challengers are able to offer higher introductory rates, so it’s even more important to consider these newer banks when you are looking for the right home for your cash.”
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