1 All Party Parliamentary Group for Ageing and Older People Older savers report: the impact on older people of savings accounts where interest rates have dropped from their initial rate to negligible amounts October 2012
2 2 We are very unhappy that the advice we were given about saving for our old age years has become untrue. Our savings have become a target for some banks, building societies even the government and other financial speculaters. i
3 3 Summary I want to be as financially independent as possible and that is why I saved for my old age. I do sometimes feel I don t know why I bothered. Which? estimates that UK savers are losing 13bn in interest each year because they aren t switching out of savings accounts paying very low rates of interest. At a time when older people are under ever increasing financial pressure, it is unacceptable that the industry penalises loyal savers. Consumer groups and the financial press have called for banks for to change, but not enough has been done. We believe the Government should do more to ensure that responsible savers who have worked hard to prepare for their retirement get the fair treatment they deserve.
4 4 What is going wrong? A cash savings account should be one of the most straightforward financial products to choose and to run. However, many consumers struggle to find the most appropriate account for them and often end up in accounts which pay much less than the best available. This is because of the way that the banking industry sells savings accounts. It is common that within any one bank or building society interest rates on savings accounts vary significantly. The variation isn t just caused by the length of time a saver is prepared to commit their money, but also by bonus rates, used to attract new savers often at the expense of loyal customers. Of the 9 products currently listed on MoneySupermarket savings accounts with bonuses front page, for example, 5 have bonus rates which are worth more than half of the total rate, with most others close to half. This means the top paying instant access account with a bonus offers 3.06% during the bonus period, falling to just 1.54% after 30 September This contrasts with the top listed non-bonus account which offers 2.75% and is guaranteed to be at least 1.70% above the base rate until 1 November ii One account falls away from 1.60% to just 0.10% in 12 months. When compared in this way, the bonus rate offers comparatively little advantage to the account with no bonus, especially given that we know so many consumers do not actually switch their accounts, even if they intend to. Whilst bonus rates can be a good deal for consumers who are willing and able to move their money each year, it s a bad deal for those who cannot. Which? estimates that 12 billion is lost to savers each year because consumers don t move their money to the best available account. iii The scale of the problem shows that this system is not working for many consumers. Though it must be noted that interest rates can, of course, also drop on accounts with no bonus rates or where the bonus rates have ended. Although industry guidance advises firms to notify customers of a disadvantageous change of a material nature 1, this requirement applies only to accounts holding 500 or more and it can still be difficult for a consumer to find out the current interest rate on their savings accounts. There are some banks that do go further and notify customers of their interest rate on statements, though. A common response to this problem is to say that individuals should simply take more responsibility for actively managing their affairs. However, there are a number of reasons that people do not switch their accounts to maximise their savings: It can be difficult to find out what interest rate your account is paying currently For those without access to the internet it can be hard to find out what offers are available Consumers can be confused by the more than 1,200 different savings accounts available Accounts themselves can be complex, so consumers need to compare not just the interest rate, but also other features, for example, an instant access savings account may allow only limited withdrawals each year. Lack of trust and low expectations in financial services firms may also have an impact. A survey by Which? on why more people don t move their savings found that 40% think that no financial institution will offer them a good deal with 35% saying they were looking into it, but hadn t got round to doing anything yet. iv 1 A material change is a single downwards change of 25bps or cumulative downwards change of 50bps over a 12 month period with respect to an account holding at least 500. Industry Guidance for FSA Banking Conduct of Business Sourcebook, 2011
5 5 Scale of the problem In February 2012, Which? researchers compared ISAs and standard savings accounts across the UK. They found that the amount of interest savers lose each year has increased by half a billion pounds since October Which? call this The Great British Savings Scandal. Despite increasing consumer pressure the problem is getting worse. Key findings from the Which? research include: 41% of the 1,800 savings accounts and cash ISAs available to UK savers are paying 0.5% interest a year or less Two in five savings accounts and cash ISAs pay 0.1% interest or less Of the 106 instant access cash ISAs open to new customers, one in six pays 0.5% or less on a balance of 5,000. v These figures illustrate how competition is failing to drive positive change across the market; if it were driving positive change, accounts paying this level of interest wouldn t be able to survive.
6 6 Relevance to older people So far I feel I have coped well with managing my finances and even enjoy doing so. It helps to keep my brain active (I am 79). Continual vigilance is vital. The biggest danger is inertia. Banks and other financial institutions rely on people not asking too many questions too often. One fear I have as I get older I may just let things be. That is a real danger. One must also guard against old-fashioned notions of loyalty unfortunately. Many older people just do not like change. This is exploited by companies by using special offers for new investors and leaving established members on less attractive deals. 67% of savings and investments are held by those over 50. vi Issues affecting savers will therefore be of particular importance to older people who have saved for later life. The current market is unfair to everyone, but those with modest savings will be especially hard hit as they are already operating on the tightest margins. 26 per cent of pensioner couples have less than 1,500 in savings. For single male pensioners, the figure is 37% and for single female pensioners, it is 43%. Over a quarter (28%) of single female pensioners have no savings at all. For single male pensioners, it is 25% and for pensioner couples, it is 17%. vii Analysis of the Financial Services Authority s Baseline Survey of Financial Capability also suggests that the situation could become more difficult for older people as they move into later life as they may be managing on reduced savings. The chart below shows that savings peak around retirement and seem to decrease in later life. viii Figure 1: Savings and investments by age band 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Under , ,001-50,000 10,001-25,000 5,001-10,000 2,501-5,000 1,001-2, , ,000 No savings and investments
7 7 Although we typically think of savings in later life as focused on income generation, many don t see their savings as incomes, but instead rely on them to pay for unexpected or larger than normal costs such as replacing an oven or minor house repairs. Recent research by Age UK found that: The amounts of money that people had in savings varied, but the common theme was the security, reassurance and peace of mind that having a bit of back-up provided, even if only a few hundred pounds. People who had such reserve funds most often saw them as something to draw on in an emergency, if something were to break down, or to enable them to travel to visit a sick relative or family abroad, if necessary. The principle here was being prepared, as you don t know what is around the corner. ix For people with relatively low levels of savings and low incomes it will be difficult or impossible to replace savings and so it s vital that they are able to access the best possible deals. This is especially true in today s low interest rate environment, where savers are struggling to even keep pace with inflation. Whilst this problem makes life difficult for all savers, it is felt especially by older savers who are no longer earning. On a fixed income and currently experiencing faster moving inflation than other age groups, pensioners will not be able to replace lost savings. This could lead to greater dependence on the State for support, even for those who have saved during their working life. It feels like a bit of a rollercoaster.
8 8 Whose responsibility is this? Financial services firms are under a duty to treat customers fairly. Consumer groups and financial press have raised the issue repeatedly over the last few years, but overall the situation is getting worse rather than better. One of the principles of the current financial services regulator, the Financial Services Authority (FSA), is that firms should treat customers fairly. However, the FSA has found it impossible under its current objectives and powers to address this unfair treatment of savers. The Government has promised that the new Financial Services Bill will establish a more interventionist regulator, which will act before consumer detriment arises. The new Financial Conduct Regulator (FCA) is expected to have powers to ban products or product features from the market if the FCA determines that the products are bad for consumers. The FCA will also have an objective to promote effective competition in the interests of consumers. xi As it has been so clearly shown that the savings market is not working competitively in the interests of consumers, we expect the FCA to take a more active role in correcting the distortions in the current market. However, given the inability of the industry and the regulator to fix the problem up till now, we feel the Government should also take further action to ensure that responsible, loyal savers get fair treatment. Bonus rate practices and a lack of transparency make it hard for responsible firms to compete. The pressures on pensioner incomes makes this a social policy issue: not only will pensioners who cannot maximise their savings lose out on income and spending power they have worked hard for, but the many pensioners on low levels of savings may also require more assistance from the government to reach a minimum standard of living. Addressing the unfair treatment of savers would also help to increase trust in the financial services sector, which is sorely needed. Recommendations Below we set out four ways in which we believe the market should change and actions we feel the Government should take to address the problem. Some actions can be taken by Government alone, others require Government to ensure that the FCA has the correct mandate and powers it needs to improve the market. At this time when the Financial Services Bill is passing through the Lords, it is critical that the Government ensures that: the regulator can make an appropriate contribution to social policy issues e.g. by identifying emerging risks and informing the Treasury; and the Treasury remains committed to dealing with social policy issues in financial services and does not delegate the entire market to the regulator
10 10 1. Reward Loyal Savers The Banks and Building Societies make it as difficult as possible for existing customers by not advertising new improved rates. It is very time consuming researching the best deal and then requesting the forms that you require and have to complete. I have found Banks and Building Societies most helpful in transferring accounts or providers but feel they should do a lot more to make existing customers aware of better rates that are available, rather than looking after new clients. Loyalty to a Bank/Building Society should be rewarded not penalised. A savings account is a very basic financial product. We agree that consumers should be responsible, but we also think that consumers should be able to keep their money safely in an account which won t penalise them for being loyal. Respondents to our questionnaire talked of checking rates every week, of the need for constant vigilance and fear of what would happen if they were unable to continue to do this themselves. Banks argue that they need to be able to offer bonus rates to attract new consumers, however this is a self-fulfilling prophecy which has driven competition in a way which does not benefit the majority of consumers. Savings accounts should not require constant active management. The issue is not just that interest rates are low; that is inevitable in the current environment. The problem is that the same institution will pay very different rates on savings placed on similar terms, penalising loyal savers. It is unacceptable that consumers who are unable to or have high barriers to switching are defaulted onto interest rates set far below market rates for non-bonus paying accounts. Action: The Government should make clear to banks and the FCA that savings accounts which drop to far below market rates are fundamentally unfair and should not be sold This change would help drive healthy competition in the market. It would prevent banks from relying on customer inertia and barriers to switching and would mean that older people who struggle to switch will not receive the derogatory interest rates currently seen.
11 11 2. Make savings accounts more transparent There are so many options available, it is very confusing. Following an intervention from the Office of Fair Trading, cash ISA providers will put personalised interest rate information on statements from this year. This should be extended so that it applies to all savings accounts. Action: The new Financial Conduct Authority should require that banks: Publish interest rates on all statements paper and online Provide each customer with an annual notice of savings interest rates, which should include all the information needed by customers to make an informed decision about whether they are in the best account for them This would reduce barriers to switching and improve savers ability to take responsibility for managing their savings effectively. It would be of particular benefit to those savers who do not have access to the internet and find searching for information about products difficult.
12 12 3. Simple Products, Simple Product Range and Real Choice I opened a building society account the other day and nearly fell down a big hole because you can only draw out 3 times a year there s so many strings and I just don t think it s fair, especially for older people. xii The Government is currently consulting on a report into the viability of a range of simple products which could help consumers who currently find it difficult to engage with the vast range of options available. An instant access and 30 day notice savings account have been proposed as part of an initial suite. Simple products have the potential to make it much easier to choose a good financial product which won t let consumers down. This is because it would be easier to choose between simple products offered by different providers and also because this product range could act as a benchmark to help consumers understand other products. Currently, the Government is expecting industry cooperation to produce a workable product suite. Action: The Government must ensure that the simple products working group report leads to an attractive range of simple products. If the industry does not voluntarily come up with workable, simple products, the Government must commit to regulatory intervention which requires simplification. Too much choice often leads to more confusion in terms of interest bearing accounts. There are over 1,200 savings accounts available to people in the UK. As many of these products are now closed to new savers and have extremely low rates of interest, the Government should promote measures to simplify the range of savings products to make it easier for consumers to find the best account for them. Action: The Government should ask the simple products working group to look at how the whole savings market, which should by definition be simple and straightforward, by for example, reducing the number of different products. Whilst improvements to individual products and the availability of information will help older consumers, simplification of the market would make the greatest difference, allowing older people to act as effective and empowered consumers.
13 13 4. Make savings accessible to everyone At one time all rates of interest and products were available in leaflet or poster form, nowadays you have to request this info or you are directed to a Business Adviser...Some of the advice from Business Advisers was totally inappropriate for my needs, i.e. investing in Stocks and Shares based products, which might be fine over the long term 5-10 years, but as an older person a 10 year investment is far too long and risky. Research conducted last year by Age UK found that older people commonly face barriers in accessing financial services because of the way that financial services and especially bank communications are designed. xiii Inflexible interpretation of identification requirements can also cause problems for older people trying to open accounts. As the number and geographic reach of bank branches continues to contract and access to products increasingly requires home internet access, more older people will find that even if they seek to proactively manage their savings, it will be physically difficult for them to do so. While online savings accounts often offer better rates, about 58% of people aged 65 and over in the UK have never used the internet and so can t benefit from these accounts. xiv Inflexible identification requirements can also cause problems for older people trying to open accounts. Although we welcome the regulations banning age discrimination in goods and services, we are disappointed that the ban completely excludes financial services. We recognise that exemptions may be appropriate to allow age to be used in risk based decisions where it can be objectively justified, however, we do not believe the industry should be exempted as a whole. Action: The Government must recognise that not only must financial services be safe and fair, but they must also be accessible. The Government should commit to review the financial services exemption to the ban on age discrimination in goods and services within one year. More broadly, the Government should also commit to ensuring that where the FCA finds its powers for consumer protection and the promotion of competition are not enough to ensure access to essential financial services for all consumers, the Government will step in.
14 14 References i Unless otherwise stated, all direct quotes in the report have come from a survey the APPG conducted in July 2012 on older people s experiences of the current savings market. ii compared with both accessed 28 August 2012 iii iv v vi An Inclusive Approach to Financial Products, Age Concern, 2008 vii Family Resources Survey 2010/11, Department for Work and Pensions, 2012 viii Chart taken from An Inclusive Approach to Financial Products, Age Concern, 2008 ix Living on a Low Income in Later Life, Age UK, 2012 x Economic Monitor Report, Autumn 2012, Age UK xi Financial Services Bill, 2012 xii An Inclusive Approach to Financial Products, Annex 2: the views of Age Concern forums, 2008 xiii The Way We Pay: Payment Systems and Financial Inclusion, Age UK, 2011 xiv Internet Access Quarterly Update Q2, ONS, August 2011 and mid-2009 population estimates, ONS 2010
15 15 For more information on the APPG, please contact Warren Seddon, Secretariat to the APPG for Ageing and Older People ).