Introductory bonus rates on savings accounts and ISAs may soon become a thing of the past, the new City regulator has suggested.
A dominant feature of the market in leading years has been the practice of inflating savings accounts with temporary bonuses worth up to 96% of the account’s ‘standard’ rate.
After a period – typically one year – returns can plummet overnight to as little as 0.1%.
Part-taxpayer-owned Lloyds TSB, highlighted in our guide to Savings and Bonus Rates for the steep decline to its accounts, pays just 0.1% on its Easy Saver account once the bonus term has expired.
"Frogs Boiled in Water"
Speaking in London, Martin Wheatley, chief executive of the Financial Conduct Authority, accused banks of exploiting consumers’ apathy or inability to switch their accounts regularly.
"The smart consumer switches at the end of that year to a new teaser rate," he said. "What do most people do? - Nothing! They stay in these products like a frog boiled in water."
This follows comments made last week, when he described the more severe bonus-laden accounts as “the financial equivalent of the Venus fly-trap”.
Such products tempted in savers with headline rates, he said, before relying on “inertia” to keep snared savers suspended in a low-performing standard account.
A table from June shows how drastically returns on savings can be affected by bonus rates, with some accounts flatlining after the initial 12 months.
Savings Deterioration
The number of accounts offering introductory bonus rates has fallen in recent months as the savings market continues to be adversely affected by the Funding for Lending Scheme.
But despite the reduced risk of savers seeing their savings plummet to negligible rates, further restrictions are condemning them to a small number of fully flexible options.
The prime example is the lack of options for savers with existing ISA nest-eggs to transfer their funds.
Only one of the top six easy-access ISAs allows inbound transfers (Cheshire Building Society, at 2.30%). Even National Savings & Investments (NS&I), the Treasury-supported savings facility, is keeping its doors closed to existing ISAs.
Other restrictions include the inability to deposit funds once a fixed-rate account is opened. Of the fixed-rate ISAs that currently beat inflation, half do not allow additional funds once the initial deposit has been made.
(Find out more about transferring cash ISAs.)
Editor’s View
On the surface, greater transparency and less exploitation can only be a good thing. The lack of urgency towards the new ‘kitemark’ system of simplicity highlights how much banks have relied upon bonus rates, restrictions, and complicated terms and conditions to bamboozle savers.
Our guide to bonus rates (transcripted here) leans heavily upon research showing that the majority of people don’t switch accounts often enough and remain clueless about the rates they are receiving on their ISAs.
But the Funding for Lending Scheme has complicated matters. Given what it’s already done to the savings market, there’s a risk that stripping bonus rates will simply leave less competition for savers at the top end of the market.
Granted – putting an end to bonus rates will end the practice of apathetic savers subsidising the returns of the savvy, which is effectively how this has operated to date. But is equalising everyone on dour rates really solving very much?
It could be argued – somewhat cynically – that educating people to the practice leaves them with an informed choice. It’s easy to blame banks for exploiting human inertia, but there’s a point to which we might take some accountability ourselves.
There’s no solution to suit everyone; the question is how many will suffer when the new regulator makes its stand.
What do you think about the culture of temporary bonus rates? Is it exploitative? Is it our responsibility to play banks at their own game? Will scrapping these bonuses solve a problem? Let us know by leaving a comment below.
James Booker and Keith McDonald
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