Savings and ISA rates: How banks could show they care

The banks are coining it in, fuelled by a surge in base rates from the end of 2021 after much more than a decade of benchmark borrowing costs being at or close to rock-bottom levels. The leap in base rates has enabled banks to ratchet up their net interest margins. These margins are the difference between what banks charge borrowers on the one hand, and what they pay savers for use of their money and the interest rates at which they can access funds on the wholesale markets on the other.

Banks have, of course, as always been quick to hike mortgage interest rates where they can as benchmark borrowing costs have risen, amid a truly grim inflation picture in the UK. And they were swift indeed to react when former chancellor Kwasi Kwarteng’s mini-Budget last September fuelled fears over the inflation outlook and just how high base rates might have to rise.

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The Bank of England has so far raised UK base rates from a record low of 0.1% in December 2021 to 4%, the highest since autumn 2008.

Bank of Scotland owner Lloyds Banking Group, HSBC, Barclays, and NatWest (formerly Royal Bank of Scotland) have in recent days all reported a major fillip to income from higher interest rates.

It remains to be seen how, in broad terms, the supposed concern among the major banks for the wellbeing of their customers plays out in distressed debt situations. Hopefully their warm words will translate into meaningful action in terms of positive steps to find resolution – rather than pull the plug – in such situations.

However, banks have a moral duty to customers in the context of savings accounts too.

It has always been the way of things that major banks and building societies, although some are certainly worse than others in this regard, benefit greatly from customers’ inertia and/or lack of awareness and time when it comes to moving their savings to accounts offering better rates of interest.

This was not quite such a big deal during the days of rock-bottom interest rates.

However, with annual UK consumer prices index inflation having surged above 10% and with base rates at 4%, and at a time when many people have been suffering enormous real-terms cuts in pay, it is now a very big deal indeed.

And it would most certainly be a good thing to see banks take meaningful steps on this front.

One ideal response would be if they ensured rates of interest paid on old accounts automatically matched those on brand new accounts of a similar type launched to attract a flow of savings.

In the vast majority of cases, however, such a scenario seems at best like a pipe dream. That said, the Financial Conduct Authority’s impending introduction of its “consumer duty” regime will hopefully prompt some improvement from the current situation of lowly back-book savings rates.

One crucial step is to raise awareness. Banks and building societies should be making customers aware, in stark and simple terms, just how much they are losing by having their savings in accounts offering inferior rates of interest, whether these are instant-access or fixed-term or notice accounts, in tax-efficient individual savings account (ISA) wrappers or not.

It is understandable that banks and building societies would pay higher interest rates when customers commit their funds for a fixed time, given this provides greater certainty of the amounts of money from savers that can be lent on to households, in mortgages and unsecured lending, and to businesses. There is no issue with this. The problem arises from older accounts offering dismal rates of interest relative to those being paid to entice new customers.

Building societies, in very general terms, seem to have been somewhat better than the big banks over years and decades in offering competitive rates on savings, although many of their older accounts have also tended to provide relatively poor value as base rates have surged.

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There are many things which could be done here.

It is not sufficient for banks to merely spell out the rates of interest paid on accounts, notify customers of changes to these, and provide details of account conditions such as withdrawal penalties.

Extra information should be provided. For example, banks and building societies could show customers a graph of the interest rates paid on their account over a period of years and, with that, a graph of how base rates have moved.

Customers would then have a clearer idea of whether or not their interest rates have been moved up anywhere near in line with the recent surge in the base rate. Many of those with older savings accounts would find right now that any rises in their interest rates had been tiny relative to movements in base rates (or in mortgage rates for that matter).

Banks and building societies could, like insurers do with renewal quotes, mention specifically and clearly to customers that they might get better value by shopping around.

The particular bank or building society could perhaps, in a similar way to energy companies providing valuable information in the old days when there were plenty of compelling fixed-rate deals around, tell customers whether or not they were getting the best value for their particular type of account.

And it could even calculate and tell savers how much better off they would be by moving their money to a similar or different type of account in its range.

You hear a lot from big banks about their drive to help educate people about their finances, often from an early age.

Some more direct help, in terms of awareness and pro-consumer interest rates, would be good right now amid the UK's awful cost-of-living crisis.

The Financial Conduct Authority’s “consumer duty” regime will have a bearing on savings rates and on many other crucial aspects of consumers’ dealings with financial sector institutions.

In a letter this month to retail banks and building societies, in advance of this duty being introduced from the end of July this year, the FCA says: “If a firm identifies that some groups of its savers, for example among its back book, are receiving poor value, then it should take prompt appropriate action to prevent further customer harm.”

It would be good to see the banks and building societies not only abide by this new duty to the maximum possible extent but also, where appropriate, go above and beyond on a voluntary basis.

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Going further than regulatory requirements to improve consumer outcomes, for savers and borrowers, might be an unlikely scenario given the short-term impact on net interest margins, profits and dividends.

However, it might be very good over the longer term for a bank or building society’s brand, and its business, if the institution were to develop a reputation as a consumer champion to be trusted.

And such exemplary behaviour would be much more meaningful than those warm words from financial institutions about how they care about hard-pressed households and business customers – talk that it would be easy to think might not be turned into action when push comes to shove.