How FLS killed interest rates

The Financial Conduct Authority has recently announced its intention to carry out a market study into the £1trn UK cash savings market, including the effects of ‘teaser rates’.

A little over 12 months ago, the best rates available to new savers were more than 50 per cent higher than they are today. As if to exacerbate this problem, the rates often included large bonuses or ‘teaser rates’ which meant that the rate was guaranteed to drop by a set amount at the end of the bonus period.

Bonuses formed such a large part of the interest earned that in some cases savers found themselves earning just 10 pence a year for every £100 saved after only 12 months.

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For example, one account last year paid 2.80 per cent gross/AER including a 2.70 per cent bonus for the first 12 months – meaning the rate dropped to a paltry 0.10 per cent after just 12 months.

Since then however, the savings landscape has changed dramatically. The Funding for Lending Scheme (FLS) was introduced on 1 August 2012, offering banks and building societies access to cheap funding to encourage them to lend to individuals and businesses.

However, the nasty side-effect was that providers suddenly had no need to access funding via savers and therefore the competition in the market all but dried up. Almost overnight the best rates being offered started to fall. The cheap funds made available to savings providers meant that they started to show little to no desire to pull in new funds, and the savers’ spiral of suffering really began.

Slowly but surely the bonus rates used to encourage more savers started to fall, then fewer and fewer accounts offered them. Currently, accounts with bonuses are scarce, presumably for a couple of reasons. Firstly, providers do not need to raise new money, so there is no desire to tempt new savers with headline-grabbing rates.

Secondly because the bonus offers savers some form of rate guarantee for a set period of time, such as 12 or 18 months, providers would prefer not to be tied to this in the current climate. They would prefer to be free to chip away at the rates as they wish and not be restricted by the bonus.

This is the environment that those savers from at least 12 months ago are now facing. The best easy-access rates are now just 1.60 per cent to 1.75 per cent and do not include bonuses, compared with 3 per cent to 3.20 per cent that were available last year (which did include a bonus).

Although we would not want to see the end of teaser rates as they are a valuable tool for the savvy saver, we can not ignore that they are also a great marketing ploy, as providers know full well that a large majority of savers will not move at the end of the bonus term. This is how providers can really gain, by luring them in with an inflated teaser rate.