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The UK’s major banks are on the government’s naughty step. On Thursday, the likes of HSBC, NatWest, Lloyds and Barclays are to be hauled in front of regulators at the Financial Conduct Authority. They face accusations of “profiteering” for not adequately passing through the Bank of England’s hefty interest rate increases to savers, while mortgage rates are soaring. Chancellor Jeremy Hunt has backed the summons, saying “increased interest rates must also be passed on to savers”.
From the government’s perspective, moral suasion to nudge savings rates higher makes political sense. Backing savers also shows it is doing its bit to try and tame Britain’s inflation problem, since higher savings help to soak up demand. Yet while pointing the finger at bankers may be an easy strategy, it is misguided. Though banks should endeavour to pass through higher rates to savers, the rates offered by each institution are ultimately based on its funding needs. Rather than pressuring banks to raise rates, the focus should be on spurring competition.
It is unsurprising that savers feel aggrieved. Banks have been slow to pass on higher rates from the BoE, which has raised base rates by almost 5 percentage points since December 2021, in particular for instant-access deposits. The average interest charged on a two-year fixed-rate mortgage has risen to 6.5 per cent; the average easy-access savings account pays closer to 2.5 per cent, according to Moneyfacts. In effect, banks’ net interest margins — the difference between the interest they charge on their loans and what they pay on deposits — have increased, but are not significantly above historical averages.
But before accusing banks of exploiting customers, there are a few points to clear up. Fixed-rate mortgages are usually tied to swap rates that move in anticipation of the BoE base rate rather than being tied to its actual level. That may partly explain why mortgage rates have risen faster than savings. Still, with many yet to remortgage, rate rises are currently benefiting savers more than they are costing mortgage payers. And, in the coming months, analysts expect margins to shrink as deposit competition picks up, mortgage spreads remain under pressure, and bad debts increase.
Rates on new longer-term savings accounts have followed the base rate more closely. They have increased by about 4 percentage points since the BoE started raising rates. As a result, savings have recently been shifting out of instant access accounts into these products — including to better deals outside banks. Banks are keener to attract long term deposits since they are less flighty and also help to meet their regulatory liquidity requirements.
The surge in deposits relative to loans since the pandemic may also explain why savings rates have not tracked the bank rate even more closely. Covid-19 lockdowns and government income support schemes led to a surge in excess savings. Awash with funds, there is less incentive for banks to compete for deposits by raising rates.
Rather than pushing against banks’ business models, authorities are better off trying to boost deposit competition. Improving awareness of available products, and making it easier to open and switch to higher-yielding accounts, is important. Exploring ways to make interest rate products easier to understand is also worthwhile. These measures should be central to the mooted “savings charter” that may emerge from Thursday’s meeting. Meanwhile, broader access to financial education would also assist savers in shopping for better bank accounts and other investment opportunities. Altogether, this should help increase banks’ incentives to raise rates to retain customers.
It is only right that the FCA is alive to the risk of banks behaving unfairly. But the discussions with banks should focus on finding co-operative ways to support deposit competition, and steer clear of dictating market terms.
