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In response to mounting political anger and scrutiny, the largest banks in the UK have made improvements to the interest rates they offer to savers. Last week, the chief executives of these banks were summoned to a meeting with the Financial Conduct Authority (FCA) after concerns were raised that the banks were not passing on interest rate increases to savers while simultaneously increasing mortgage costs.
There are indications that savings rates have begun to improve, particularly for instant access accounts. However, it can take time for lenders to adjust their savings products in response to base rate rises. Additionally, the market is becoming more competitive, with savers actively searching for better rates, putting pressure on banks to enhance their offerings.
According to Moneyfacts, a two-year fixed savings account with £10,000 increased from an average rate of 4.79% on the day of the FCA meeting (July 6) to 5.07% on Friday. An easy access savings account that paid 2.49% on July 6 is now paying 2.6%.
Harriett Baldwin, Chair of the Treasury Select Committee, commented that while it is positive to see some firms responding to pressure, the rates offered by high-street banks for easy access accounts continue to lag behind the average and are significantly lower than the Bank of England base rate. Baldwin urged banks to inform customers about better product options.
Despite the Bank of England’s 13 consecutive rate rises, MPs argue that not enough has been passed on to savers. The cost of a two-year fixed-rate mortgage has reached 6.78%, the highest level since the 2008 financial crisis.
The CEO of a high-street bank denied that the recent increase in savings rates was a result of the FCA meeting, instead attributing it to competition in the deposit market. The CEO emphasized that the pricing of deposits is determined by factors such as funding, liquidity, and market competition, rather than FCA regulation.
Meanwhile, major American banks are benefiting from higher interest rates, even as concerns grow over loan defaults, particularly in commercial real estate. JPMorgan Chase recently reported an increase in profits for the second quarter.
Richard Buxton, a UK fund manager, stated that the return on equity for banks is not excessive and that banks are passing on the benefits of higher rates. Buxton also highlighted the difference between the banking models in the US and the UK, with US banks trading at a premium to book value compared to UK banks trading at a discount.
BoE Governor Andrew Bailey expressed his opinion that it is important for UK banks to pass on higher interest rates to savers and noted that banks are in a strong financial position to do so.
In its meeting with lenders, the FCA acknowledged the improvements in savings rates but urged for accelerated progress. The FCA is also investigating investment platforms for profits generated on customers’ cash and will provide a report on its work in the savings market by the end of July. Additionally, new consumer duty rules, which prioritize “good outcomes” for clients, will come into effect at the end of July.
As UK banks prepare to release their healthy first-half profits later this month, they face increased scrutiny and must respond to the select committee’s concerns regarding rates offered to savers by Monday.
During the investigation into retail banks, the four largest banks in the UK offered easy access savings rates ranging from 0.5% to 0.65% against a 4% base rate. Currently, these banks are offering rates between 0.9% and 1.75% while the base rate stands at 5%.
Nigel Terrington, CEO of Paragon Banking Group, pointed out that the fixed rates offered by the big four banks are not a significant portion of their overall balances and highlighted the much lower rates on their easy access accounts.
Some bank analysts argue that the savings market is already competitive and caution against further rate increases that may negatively impact borrowers in the future. Shareholders in UK banks remain optimistic, viewing pressure from politicians and regulators as a minor concern given the profitability of banks in the current environment.
Ian Lance, co-head of the UK value and income team at Redwheel, believes that banks should not be blamed for the cost of living crisis and emphasizes that regulators should focus on building capital ahead of any potential increase in loan losses during an economic downturn, rather than setting profitability targets.
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