Activists, campaigners and MPs are growing increasingly concerned that savings rates are failing to keep pace with the rapid rise in borrowing costs, putting the behaviour of the UK’s biggest banks in the spotlight.
While worries are mounting about how mortgage holders will cope with higher interest rates, less focus has been put on savers. This group is often frustrated when mortgage rates seem to rise lock-step with the Bank of England’s base rate, while savings rates seem to be lower and slower to respond.
Banks’ profits are generally improved by an increase in interest rates. It tends to boost net interest income: the amount of money banks claw in from higher borrowing costs now outpaces the amount they pay out in interest on deposits.
A clear picture of how big the profit haul from higher rates may prove to be has not emerged yet, given how rapidly rates have risen this year versus last.
The first best indication will come this summer, when they report half-year results. But early signs are already coming through: Lloyds Banking Group – which owns Halifax – reported a 46% leap in pretax profit for the first three months of the year. NatWest’s first-quarter profits rose 50%.
The size of the leap has to be compared with a relatively lean time for banks’ profits after a decade of ultra-low interest rates, but the direction of travel is stark.
Commentators such as Martin Lewis, the MoneySavingExpert.com founder, have argued there is a moral case for banks to offer better savings rates to consumers after taxpayers bailed out financial institutions after the 2008 financial crisis. The consumer group Which? has called some of the savings rates on offer “measly”.
The Bank of England’s key interest rate has been above 4% since February this year, climbing to 5% on Thursday.
Easy access savings accounts at large high street banks have been slow to rise. Barclays offers just 0.85% on its easy access Everyday Saver; HSBC 1.35% on its easy access Flexible Saver; and NatWest 1.11% on its Flexible Saver account for savings under £25,000. If a consumer locks their money away for 12 months, they can get rates as high as 7% at some big banks.
Some smaller competitors, such as GB Bank, Oxbury bank, and the building societies Principality and Coventry offer easy access accounts with more than 4% interest, according to MoneyFacts data.
This discrepancy is under intense scrutiny from the City watchdog. The Financial Conduct Authority has already warned banks it may introduce a minimum rate for such products if consumers continue to face “loyalty penalties” by looking to their current account provider, often a high street bank, for saving products.
Lewis tweeted on Thursday: “The fact banks are only fully passing rate rises on to borrowers not savers is counterproductive and profiteering. Encouraging saving, takes money out of the economy to help inflation too. Govt should be pushing hard to ensure banks don’t just increase margins.”
But when putting pressure on banks, industry and regulatory insiders believe it is important to do so in a nuanced way: pushing for better rates on some easy access savings accounts for a wider pool of savers if it suits their needs, rather than expecting an immediate equalisation of mortgage and savings rates, which can respond to different factors. Relatively wealthy, savvy savers who can lock away their money for a long time are able to get very attractive rates already.
Eric Leenders, the managing director of personal finance at the banking lobby group UK Finance, said: “It’s very easy to save when you’re in well-paid salaried employment; it’s very difficult when you’ve just about budgeted and all your surplus cash is gone.”
He added that the industry could do more to help consumers work out their medium- and long-term financial goals – which was also part of the a new, regulator-imposed “consumer duty”.
“What we’re trying to do is broaden the community that can give that kind of advice,” Leenders said.
Often, that will mean banks will be required to offer budgeting help to consumers first, before they are able – if their income allows – to set aside some money for a holiday or a rainy day.
The FCA is to impose the consumer duty from 31 July. The rules, which the watchdog has statutory powers to enforce, will require banks to show their customers get a “fair price” and “suitable products and services”, and that “diverse consumer needs are met”.
In February, the FCA wrote to banks and building societies warning them of a need to show evidence to their boards and the watchdog that savers were getting fair outcomes.
Some senior bankers who support the principle of the new duty are concerned about how effectively it will be enforced by a resource-strapped regulator. While the FCA has promised “onerous interventions” if consumers are poorly served by sticking with a bank for its savings products, it remains unclear what that will mean in practice.
Lewis and charities are among those watching and waiting to see whether the consumer duty has a real impact. Citizens Advice said the duty needed “to be underpinned by clear, unambiguous rules, effective monitoring and proactive enforcement”.
Still, even a well-enforced duty would face limits on how it can influence savings rates.
The rates on these products – as well as on mortgages – are not only influenced by profit greed, or the Bank of England’s key interest rate. The balance sheets of banks treat deposits (savings) as liabilities and lending (unsecured loans, mortgages) as assets. They carry different risks and so they are priced differently, banks claim.
Mortgage prices, for instance, often have to reflect a gloomy economic outlook rather than just central bank rates. If the economy stagnates or struggles, then the rate at which people fail to pay back loans or mortgages can fall, putting pressure on banks’ profits.
Regulatory costs, such as how much money they have to set aside for disasters after the 2008 financial crisis, are also affected by movements in interest rates and price rises. Banks’ overheads, as with other businesses, climb with inflation.
A good test for working out if banks are poised for big profits are investors’ views on whether rising interest rates are expected to translate into a windfall. They watch a bank’s lending rates versus its rates for deposits – they call this the “jaws” or net interest margin.
So far, it is not looking like a bonanza, at least for UK high street retail banks. Shares in three out of the big four – Barclays, Lloyds and NatWest – have fallen the year to date. HSBC is an outlier with its shares up significantly so far in 2023 after announcing it will quit a range of smaller markets, although the UK also accounts for a relatively small part of its global business empire.
Some banks sustained profits throughout a decade of low interest rates, but investors believe this was because they generally track economic growth. The near-term forecast for UK gross domestic product is meagre at best.
A spokesperson for HSBC UK said the bank provided a broad range of savings products to consumers, adding: “We have increased interest rates on savings accounts a dozen times in just over a year, and every savings product has seen its interest rate increase on multiple occasions during that time, supporting customers to start a positive savings habit and save towards longer term goals. We will continue to keep rates under review.”
