Banks increasingly penalising loyal savers as interest rates rise, says financial watchdog

Savers are losing out as some banks are slow to pass on rate rises, says the financial watchdog
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High street banks were accused on Thursday of increasingly penalising loyal savers compared to new customers as interest rates have risen.

Some lenders also came under fire for dragging their feet over passing on interest rate rises to savers, while being quick to do so for mortgage holders and other borrowers.

The financial watchdog told the Commons Treasury committtee that it was “standard practice” for banks to offer more attractive rates to new savers, while leaving existing savers earning less competitive rates.

“We expect that the harm from this practice (and the loyalty penalty faced by longstanding customers) will have increased as the base rate has risen,” the Financial Conduct Authority added.

Interest rates hit a historic low of just 0.10 per cent in March 2020 and have now risen to 4.25 per cent.

Further increases are expected, possibly to five per cent by late summer, to control inflation which was still above ten per cent in March.

The FCA stressed: “We have been monitoring the speed and extent of firms’ pass-through to their savings products following increases in the base rate.

“We have challenged and sought further information from some outlier firms that had made relatively small increases to their variable rate savings products in 2022 and where we saw a material time lag in pass through to savings products relative to mortgages.”

The Treasury committee has been probing how banks are passing on interest rates and treating their loyal and other customers.

Committee chair Harriett Baldwin MP said: “The regulator has now given us official confirmation that the UK’s biggest banks are profiting from interest rate rises and that loyal savers are being increasingly harmed.

“While it’s welcome to hear the financial regulator is monitoring this situation, we will be keeping a close eye to ensure they act on these assurances. Consumers should continue to shop around to get the best rates possible.”

She added: “With banks set to release their first quarter results in the coming weeks, we will be monitoring whether firms are continuing to squeeze profits from their loyal savings customers.”

A spokesperson for UK Finance, which represents the banks and other lenders, said: “The rates an individual firm offers on its savings products are driven by a number of different factors, not just the Bank of England’s Bank Rate.

“One key factor is whether someone wants instant access or can deposit their money for a longer period of time.

“The market is competitive with a range of fixed and variable rate products available. We would always encourage customers to shop around for the product and interest rate that is best suited to their needs.”

The FCA is also encouraging savers to switch to a different lender if they are dissatisfied with the “value they are getting from their current provider”.

From July 31, banks will have to comply with a Consumer Duty which includes acting in good faith towards, and providing fair value to, all groups of savers, it added.

It highlighted that this would mean considering the gap in rates offered for loyal and other customers.

“The Consumer Duty’s focus on the fairness of pricing for all groups of savers challenges this practice and will require a significant cultural shift from firms,” it said.

“We would acknowledge that some firms have already made adjustments.”

In the letter to the Treasury committee, the financial watchdog also said that the number of people re-mortgaging with a different provider to secure a better deal has increased since 2016.

It also warned that the number of mortgages with ‘financial stretch’, where a household’s mortgage payment is over 30 per cent of their total income, may increase to 356,000 by June 2024.

Monthly payments could rise by 50 per cent or more for 67,000 mortgage holders, it added.

However, the regulator also emphasied that 90 per cent of consumers with mortgages exposed to interest rate rises are not expected to become financially stretched.

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