Regulator Puts Savers in its Sights

The FCA's proposal for a basic savings rate is just one of the developments affecting advisers this summer

James Gard 30 August, 2018 | 7:43AM

Financial adviser

The Bank of England’s interest rate rise has turned the spotlight on savings rates, with many providers failing to pass on the most recent rate rise.

In response to banks falling short, the Financial Conduct Authority has raised the idea of “a basic savings rate” for long-term customers, whose accounts are currently languishing on negligible rates. This problem has been on the regulator’s radar for a number of years. In 2015 it published the lowest savings rates available in the market for the first time as part of a “sunlight remedy” to expose the worst deals on offer.

“We have called this publication the ‘sunlight’ remedy because we are shining a light on interest rates that are not prominently displayed, but that may be earned by some customers. These customers stand to lose out by not switching to a different account,” the regulator said.

How would a basic savings rate work? After a certain period of time, an account would revert to a single savings rate, to be decided by the bank or building society. So a provider could not offer different rates based on the age of the account or the way it is managed, whether by post or online, or even by the size of the account.

Currently, those holding the largest amounts get the best rates. And newer savers are often rewarded by “teaser” rates at expense of more loyal customers. The aim is to bring transparency to a market where it is often hard for savers to compare products between providers.

Currently a discussion paper, the FCA’s idea would increase interest rates across the board but also add to the cost base for banks and building societies. Some banks share prices moved downward on the news. The FCA’s proposals are likely to feed into the Government’s reforms of the ISA market, which is seen by advisers as too complex.

FCA Wants Better Information for Retail Customers

The FCA’s Asset Management Market Study, which aims to improve the way fund managers communicate with customers and improve the value of their products, has been ongoing for nearly three years. The final report was published last summer, but the regulator has been consulting this year on the “remedies” put forward in the report – the latest consultation has just closed.

Morningstar responded to the consultation and “is supportive of the proposed guidance”, writes director Andy Pettit.

One area that could be improved, Pettit adds, concerns multi-asset funds, “a type of fund for which objectives are critical but do not always provide enough information to investors”.

New proposals include improving how fund objectives are expressed more clearly to investors. This centres on the use of benchmarks: asset managers are urged to make it clearer when funds are “benchmark-constrained” or limited to how far their holdings can differ from the weightings of a benchmark index. Where a fund uses one or more benchmarks, this should be disclosed consistently and explained to investors.

Investors should be given more information about funds’ constraints, Morningstar believes, “reducing the chance an investor’s asset allocation will be misaligned with his or her targets”.

The FCA also published its interim report of its Platform Market Study and its provisional view on competition in the sector. Five consumer scenarios are cited by the regulator as concerns:

  • Risks and returns of similarly labelled model portfolios are unclear
  • Consumers may be missing out by holding too much cash on consumer platforms
  • Switching between platforms can be difficult
  • Price sensitive consumers can find it difficult to shop around and compare fees.

Platforms could improve how they present fund charges at different stages of a consumer's decision making process, the regulator believes.

A feedback period is open until 21 September, 2018 and the final report will be issued in the first quarter of 2019.

The FCA is also asking for responses to its review of “Key Information Documents”, which inform retail investors about the risks and features of a fund in a standardised format. The regulator is keen to know, for example, whether investors find breakdowns of transaction costs useful – and is expected to publish feedback next year.

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About Author

James Gard  is subeditor for Morningstar.co.uk