Cascade Commentary

July 2020

The Financial Conduct Authority (FCA) has released proposals to improve competition and protect consumers in the easy access savings market to make it simpler and easier for savers to understand the products available to them and to obtain a good deal. Typically, longstanding customers on easy access accounts earn the lowest savings rates, having earned an attractive headline rate at onset followed by rate downgrades as time goes on. The FCA is consulting on two complementary proposals to achieve fair pricing and improve competition for longstanding customers, including the introduction of a Single Easy Access Rate (SEAR) and the subsequent transparent publication of SEARs to make it easier for consumers to compare between providers.

These proposals follow the 2015 findings of the FCA’s Cash Savings Market Study which made several proposals regarding cash market remedies that were aimed at ensuring financial fairness for all. This report found that the savings market was not working effectively for savers and particularly for those with easy access savings accounts and easy access cash ISAs. It is estimated that the introduction of SEARs and their transparent publication will incur total one-off costs of £94m with an annual ongoing cost of £35m. Consumers however are estimated to benefit between £148m and £381m per year from higher interest payments (with a mean estimate of £261m).

Nearly three-quarters of UK adults hold an easy access savings account, with significant aggregate balances. The competition for new customers is strong and providers usually compete on headline rate. Many will offer a high introductory interest rate to attract new customers but over time this rate falls and it is up to the customer to stay on top of alternative rates and products available. More often than not, inertia and an expected hassle to switch sets in and consumers end up in low-interest rate accounts earning significantly lower returns but by that time, often with higher balances. The FCA estimates that rates on average are 0.42% lower on accounts opened more than 5 years ago as opposed to those opened in the last year.

While the regulator’s original analysis was based on 2013 data, the FCA reset their findings using 2018 data and still found similar harm from price discrimination for savers. As interest rates are low across the spectrum, the harm is structurally becoming minimised but should interest rates increase, then the expected impact and harm caused will also increase and become more widespread hence preventative interventions are required in advance.

A good example for rate downgrades can be seen in the highly publicised Marcus by Goldman Sachs Instant Access account which led the market at 1.50% in 2018 and is now at 1.05%, some 0.45% lower. The initial launch attracted a lot of publicity and drove price competition up for new customers, but this was largely driven by the inclusion of an introductory bonus for 12 months of 0.15% for the first year of launch and then 0.10% for Q4 2019 before the bonus was removed entirely in Q1 2020. Marcus by Goldman Sachs have kept customers aware of the rate changes but for those that may not check their emails and accounts regularly, then on an £85,000 deposit opened in 2018, up to £382.50 annually has since been lost in future income as rates have been downgraded. By shopping around, customers could find for example that the NS&I Income Bond on Instant Access is now paying 1.16% providing nearly £100.00 more per annum per account. While these differences may seem marginal to the naked eye, when you compound them over time, the results become quite costly.

The FCA are hoping that these changes in the savings market will feed through into other products such as current accounts, overdrafts, mortgages and credit cards. The consultation for SEARs closed on 9^th April 2020 with new responses to be considered and any changes implemented during the 2021/22 tax year. We’ll keep you abreast of any changes as and when they are enacted and we encourage you to ensure you’re aware of the interest rates being paid on all of your cash accounts in the meantime.