Emma Ann HughesJul 27 2018

Why advisers are wrong to slate the FCA's suggestion

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Why advisers are wrong to slate the FCA's suggestion
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One adviser wrote in our comment section: "The dictators broadly tell providers how much they can charge. Now they are possibly telling them to pay a minimum return. Perhaps they can do this to all products.”

Another adviser remarked: “Typical FCA tripe. Customer inaction, inertia, less active customers. In other words, too flippin' lazy to do anything about it. So it must be the fault of the banks for not treating them fairly.”

A further adviser wrote: "Who in Heaven's name do these guys think they are, to come out with this type of utter garbage?"

However, I know this is going to upset some of you, but I actually believe the FCA is right to step in on this occasion.

The reality of the world is if they can't face going into a branch to switch accounts they are unlikely to walk into your offices and pay for your help.

Too often regulation is not based on how people actually behave. Are you worried people aren’t engaged or understand the financial products they are investing in?

Should the response be to create rules that barrage them with page after page of paperwork that goes on and on about the pros and cons of a product?

On this occasion, the FCA has quite rightly put its hands up and realised that no matter how many rules it creates, forcing banks and building societies to explain how a better rate could be created by shifting to another savings account, people just don’t take this information in or act upon it.

As part of the FCA’s proposal, published in a 43-page discussion paper, the regulator would force each provider to offer a single interest rate, which they would be able to set themselves, to their mid-book and back-book cash savings accounts.

The FCA said this would work by pooling mid-book cash savers, who are more likely to switch, with back-book savers, who are much less likely to do so, with the same rate.

The presence of more active customers in the pool would place pressure on providers to set a higher basic savings rate for their less active customers than they currently do.

As part of its research into this area, the FCA found providers take advantage of inertia in the cash savings market by having significant amounts of consumers' savings in accounts opened more than five years ago which typically pay lower interest rates than those opened more recently.

For example, in easy access products accounts opened up to two years ago can pay more than 1 per cent interest while those opened more than five years ago can pay around 0.25 per cent.

In 2015, after its cash savings market study, the FCA introduced a number of measures, including a summary box and more prominent display of interest rate information, but it has acknowledged that this simply did not result in people acting to secure a better savings rate.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "Providers can take advantage of high levels of customer inaction to pay lower interest rates to longstanding customers.

"While many customers have valid reasons for not shopping around, providers must still treat them fairly, while maintaining competitive rates for those who do."

I agree with Mr Woolard - it is all very well and good for advisers to say the FCA is acting like a dictatorship and why doesn’t it simply push lazy savers to seek financial advice but the reality of the world is if they can't face going into a branch to switch accounts they are unlikely to walk into your offices and pay for your help.

I would argue the FCA's latest suggestion protects consumers from their own behaviour – which is the FCA’s remit – by recognising that especially elderly savers don’t know that in 2018 you aren’t rewarded for loyalty.

If you opened an account because it had the best rate available at that time, that is you saying this is what you want.

If your account is no longer the best rate available, banks should simply switch you across to their savings account with the same conditions and greatest interest available when that change happens.

emma.hughes@ft.com