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(Adds banking sector reaction)
By Huw Jones
LONDON, Jan 9 (Reuters) - Britain's financial markets
watchdog proposed an overhaul of cash saving products on
Thursday designed to improve interest rates offered to
long-standing customers.
The Financial Conduct Authority (FCA) said last year that
first-time customers for cash savings products were getting
higher interest rates than existing customers when they came off
introductory offers, dubbed a loyalty penalty in the industry.
Under the FCA proposals, firms will have to set a single
easy access rate (SEAR) across all accounts that let savers
withdraw their money when they want in a move that would boost
interest payments by 260 million pounds ($341 million) a year.
Banks will still be able to compete by offering an
introductory rate that is usually cut after a set period.
"Firms will have flexibility to offer multiple introductory
rates for up to 12 months, then they will need to choose one
SEAR for their easy access cash savings accounts, and one for
their easy access cash savings ISAs," the FCA said.
The FCA said competition in cash savings products was not
working well for many of the 40 million consumers who hold
either an easy access savings account or easy access cash
Individual Savings Account (ISA).
Christopher Woolard, the FCA's head of competition, said the
proposed new rule should be in place before the start of the
2021-2022 tax year and will help the 90% of cash investors that
switch products infrequently or not at all.
UK Finance, which represents banks, said that regulatory
intervention that increases the overall cost of deposit funding
for providers will, in general, result in providers having to
raise the cost of loans to maintain adequate margins.
Companies will also have to publish data every six months on
the SEARs they offer so investors can compare different
institutions when they first open a savings account.
One bank was offering over 80 easy access accounts paying
between 1.45% and 0.25% interest even though they are virtually
identical, Woolard said.
Citizens Advice, a consumer body campaigning against loyalty
penalties, said the FCA "must now hold its nerve and make sure
these proposals are introduced".
The Bank of England's main interest rate has been hovering
around record lows for the past decade, hitting the rates on
products such as popular individual savings accounts or ISAs -
even before discriminatory rates for long-standing customers.
The watchdog has put out the proposals for public
consultation.
"The plans from the regulator would be a dramatic change to
the cash savings market and will mean banks can't hide behind a
vast array of different interest rates for cash accounts," said
Laura Suter, personal finance analyst at investment platform AJ
Bell.
"Banks will also no longer be able to quietly ratchet down
interest rates they pay on cash savings over time, in the hope
that customers won't notice," Suter said.
($1 = 0.7625 pounds)
(Reporting by Huw Jones; Editing by Sinead Cruise, David Clarke
and Toby Chopra)
