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Low savings accounts rates targeted
Banks who rely on customer inertia to pay ultra-low interest rates on savings accounts are facing a potential crackdown from the City watchdog.
The Financial Conduct Authority (FCA) is considering whether to intervene in order to boost competition within a market in which six providers hold roughly two-thirds of all cash savings balances in the UK.
It is concerned that because many consumers do not shop around, banks are able to pay lower interest rates to customers that have stayed with the same account for a number of years.
At the end of 2013, the average interest rate on easy access accounts opened in the last two years was around 0.8%, but the equivalent rate for accounts that were opened more than five years ago was less than 0.3%.
The FCA said: "While some consumers may switch away in response to the lowered rates, a significant proportion of consumers do not."
The regulator estimates that 82% of adults in the UK have a savings account, with the average sum amounting to £6,400.
The investigation has been focused on easy access accounts and no-term cash ISA accounts, which are estimated to account for around two thirds of total cash savings balances held by firms in the study.
At the largest firms, more than 80% of their total balances in easy access accounts are held by consumers who also hold a current account with the same provider.
The average interest rate offered by these leading current account providers on easy access savings accounts opened in the last two years is around 0.5%, but the equivalent rate offered by other providers is 1.2%.
The FCA said: "Low levels of switching by consumers and the high proportion of savings balances held by personal current account providers have been cited by new and growing firms as a key barrier to expansion in this market.
"Because many consumers are not inclined to switch account and/or provider, it is difficult for new firms to attract these consumers, and to attract and retain those consumers that do switch, these firms must offer relatively higher interest rates."
The FCA will now undertake further research before taking a view on whether it should take further steps to ensure competition is working in the interests of consumers.
It will look at what can be done to ensure that more consumers are aware of the rates they receive and the rates on offer on other accounts.
The regulator will also consider the information that customers are given when rates are changing and whether it is possible to give consumers greater insight into how their interest rate is likely to evolve over time.
The FCA said: " At one extreme is a small group of so-called 'rate chasers', a cohort of consumers who pay close attention to the products and rates being offered and who switch regularly to increase the interest they receive on their savings.
"At the other, there is a much larger group of consumers who pay little attention to the accounts on offer and who, for long periods, will not consider whether they could earn a higher return by moving to a different account."
Richard Lloyd, executive director of consumer group Which?, said banks are not doing enough to help their customers get the best deals.
He said: " Banks should be crystal clear about interest rates, let people know when bonus rates come to an end and make it easier for people to switch Isas."
Andrew Hagger, founder of website Moneycomms.co.uk, said that in the low interest rate environment "it's not really surprising" that many people do not bother to switch deals.
He suggested that people with smaller savings pots may find they are better off putting their money in a current account, some of which now pay up to 5% interest, rather than a traditional savings account.
Competition in the current account market has been ramped up since new rules were introduced to make it easier for people to ditch their old bank and switch to a new one.
Mr Hagger said: "For those with small savings balances, current account deals such as TSB Classic Plus, Lloyds Bank, Tesco Bank and Santander offer a far better alternative than traditional savings products."
Kevin Mountford, head of banking at MoneySuperMarket, said that if people did switch their savings accounts more often, this would put more pressure on banks and building societies to offer better deals "across the board".