£250bn in savings held in accounts which earn no interest

The Financial Conduct Authority (FCA)’s cash savings market review has put providers and the rates being offered under the spotlight.

Here are some of the review’s key findings:

– Consumers collectively hold around £1.5 trillion in savings accounts, excluding balances held in NS&I (National Savings and Investments) accounts.

– Bank of England data indicates that around £250 billion is sitting in deposits which earn no interest.

– Around three in 10 adults do not have a savings account of any type – which the FCA said highlights the need to focus on building more consumer financial resilience in the UK.

– For all savings products, it is critical that savers are offered fair and competitive rates, the FCA said.

Savings providers offer a range of products, from easy access accounts to fixed-term accounts, meeting different needs. Some accounts can only be opened and operated online or digitally, while others can be opened and operated face to face, through a branch network for example.

– Three-quarters (75%) of consumers with a savings account hold funds with their main current account provider. This helps bigger firms to benefit from their large market shares of personal current accounts.

– But there have recently been signs of more current account customers ditching and switching, using the Current Account Switch Service (Cass). And the FCA’s most recent report indicated that challenger banks hold around 8% of personal current accounts, compared with 1% five years ago.

– Savers are also moving money into fixed-term deposit accounts. Since the start of 2023, there has been a reduction of £52 billion (around 4% of total deposits) held in easy access accounts and an increase of £38 billion (around 3% of total deposits) held in fixed-term or notice accounts across nine of the largest firms.

– For easy access accounts, in which 60% of balances across nine of the largest firms are held, the average interest rate has risen from 0.07% to 1.25% between January 2022 and May 2023.

– For fixed-term and notice accounts, the average interest rate has risen from 0.3% to 2.47% over the same period.

– As of July 2023, the FCA said it has seen the top easy access rates range from 4% to 5%.

– Firms’ pricing decisions are determined by several factors, including wider economic conditions and what that means for providers’ need to attract savings deposits, companies’ different business models, prudential requirements (which help make markets safer for consumers), how firms hedge their balance sheets, their approach to funding, and the impact of rules.

This means there will not be a direct relationship between savings rates and the base rate, the regulator said.

– The FCA previously started consulting on a “single easy access rate” (Sear) policy in January 2020, to address concerns about a potential loyalty penalty, where longstanding customers receive worse rates than new customers, in the cash savings market.

The coronavirus pandemic and the historically low interest rate environment at the time resulted in the FCA deprioritising this work in November 2020.

The regulator now believes that the new consumer duty gives it greater flexibility to react to market developments and to take proportionate action against outliers.

The regulator said that, at this stage, it does not propose to restart a consultation on a Sear, since some firms are improving their off-sale rates and “we believe that competition is driving up these rates over time”.