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9 Jan 2020

Banks could set a single easy-access interest rate for old accounts

Loyal savers would get £260m boost from higher interest payments

Savings providers could soon have to set a default rate for easy-access accounts held for longer than 12 months, under new rules from the Financial Conduct Authority (FCA).

The proposed shake-up would prevent firms from punishing loyal savings customers.

£9 in every £10 held in easy-access accounts has been held in the same account for over a year.

Which?'s campaign Scrap the Savings Trappreviously called for banks to help savers who are stuck in 'zombie' accounts paying substandard rates.

The new rules will come into force from April 2021 and the FCA estimates that introducing a Single Easy Access Rate (SEAR) will boost interest payments to savers by £260m.

Here, Which? explains how the system will work and how it will impact loyal customers as well as savvy switchers.

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How will the Single Easy Access Rate (SEAR) work?

Under the new rules, banks and building societies will have to offer a set single interest rate across their easy-access savings and Isa accounts.

The FCA says firms will be able to offer multiple other accounts with rates on offer for up to 12 months, but savers would rollover to an easy-access saving or cash Isa deal that pays a set rate.

The SEAR will be set by the bank or building society, so it will differ by provider.

It is also possible for providers to set different SEARs for easy access accounts and easy access Isas.

The SEAR will mean that, rather than a series of cuts over time, after 12 months every easy-access account at a bank will revert to the same rate - making it crystal clear who is getting the best deal.

What rate will you get on your savings?

One concern over introducing a basic savings rate was that savers who routinely switched providers would take a hit.

The FCA says the new rules are likely to have an impact on the rate that new customers are offered - but not much. It estimates that the rates on savings accounts could fall by 0.01%, from 1.35% to 1.34%.

Meanwhile, the rate for longstanding customers most at risk of being hit with rate cuts would increase by an average of 0.23%, from 0.55% to 0.78%.

However, the SEAR is still likely to be much lower than what new customers get.

You'll need to keep track of the rate your savings are earning and shop around for more competitive options even after the SEAR is introduced.

Firms will have to publish data on the SEARs every six months, so this will make it easier to see which providers offer the most competitive rates for existing customers.

Why is the FCA taking action?

It's estimated that 40 million savers have either an easy-access savings account or an easy-access cash Isa, but two thirds tend not to switch regularly, which means savings are likely to be languishing on measly returns.

Banks often use 'teaser rates' to lure in customers. These artificially boost returns for a short period, before reverting to a much lower rate, which is often reduced further over time.

Numerous Which? investigations have found that providers also move savers into rollover accounts paying paltry rates after introductory terms come to an end.

In April 2017, we found that three quarters of the accounts we looked at (35 out of a total 48) reverted to variable accounts paying as little as 0.01%.

Jenny Ross, editor of Which? Money, said: 'For too long now, savers have found themselves stuck earning paltry returns, as firms have taken advantage of their long-term customers.

'Switching is complicated by firms offering a huge array of products at different rates, often with unclear pricing information, so it's right that the regulator is intervening with the introduction of a single easy-access rate.

'The FCA must now closely monitor how this rate will work in practice, to ensure it's successful in making the market simpler to understand and delivering better returns for savers.'

Tackling the 'loyalty penalty' on insurance

The FCA is also working on other measures to prevent loyal motor and home insurance customers paying a 'loyalty penalty'.

It estimates that around six million policyholders pay as much as £1.2bn more than they need to because they don't switch.

The regulator is currently consulting on rules that could ban this unfair pricing practice.