A warning to FCA boss Martin Wheatley – please don't screw up the savings market

I read with horror a BBC news headline yesterday – Financial Conduct Authority (FCA) hints it may act act on ‘teaser’ rates – based on comments by the new regulator, the FCA’s (was the FSA) boss, Martin Wheatley. Thankfully, later in the piece it says he wouldn’t consider an outright ban on teaser rates, just some tinkering. However it still concerns me.

This is all about canning introductory bonus rates on savings products, which are used as bait to draw new customers in. In the past, when interest rates were high, I warned about them, yet with today’s dire interest rates, it needs to be understood they are the ONLY thing allowing savers to earn decent rates.

I have written before on this, see my I disagree with The Sunday Times call to ban bonus rates blog, so let me explain it in a different way this time (this blog has been bashed out at speed so forgive the poor prose).

Why we need bonus rates of interest right now

Getting rid of bonuses assumes ‘non-bonus’ accounts pay consistent rates. Yet all easy-access savings are ‘variable rate’, which means banks can, and do change rates (ie, drop them) willy nilly – not just when the Bank of England moves UK rates – but for their own competitive reasons too. So the idea that it’s only bonus rates that are inconsistent is simply wrong.

There are also many clean rates out there which once started as market-leading deals, but are now dismal at 1% or less.

Now let’s contrast that with an account with an introductory bonus as part of the initial rate – effectively a temporary interest hike to attract new customers.

Take the Cheshire Building Society’s current cash ISA product (see our Top Cash Isas guide for the best rates). It is 2.3% AER with a 1.8% bonus lasting until 31 October 2014. That means it has three advantages over standard variable deals:

1. A high initial rate

   All the top deals are intro bonus rates, which pay more than non-bonus rates.

2. We know when the rate will drop

   Unlike non-bonus ‘variable’ accounts where the rate can drop at any time – here we have a defined period of a higher rate – and a date for the diary to ditch and switch. It actually means less monitoring is needed as you have more certainty of knowing when it’s going to go bad.

3. It acts an an effective minimum rate guarantee

   In some ways, big bonuses like this are the holy grail of savings in a low interest rate environment, as the bonus acts as a 1.8% minimum rate guarantee lasting 18 months. 

In a low interest rate environment, we must accept that keeping savings rates as high as possible needs active aggressive saving. Getting rid of bonus rates won’t change that, it’ll just mean lower rates, needing more work.

I’d love to see a savings environment with more tracker-type rates, which give decent, consistent returns. Sadly, the only ones available right now give awful rates. So in these days of dismal interest, to call for something which risks decreasing the rate available for savers is a dangerous move.

Thoughts?