Hunt demands action from banks to reward savers

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Banks have been warned by chancellor Jeremy Hunt they could face a regulatory crackdown unless they pass on higher interest rates to savers, amid claims the sector is profiting at the expense of struggling households.

Hunt said on Monday that while mortgage rates had soared, it was taking “too long” for savers with instant access bank accounts to enjoy higher returns.

“I’m working on a solution,” he told the House of Commons. “It’s an issue that needs to be resolved.”

The chancellor wants to boost interest rates on savings, partly to help households but also to cut consumer spending, as he seeks to help the Bank of England fight inflation. Last week the central bank raised its base rate to 5 per cent to try to curb price rises.

Hunt said he had told lenders “in no uncertain terms” at a private meeting last Friday that he wanted to see action to address the issue facing savers, but on Monday the political heat increased.

Downing Street said: “We absolutely expect banks to pass through higher rates to savers, as they are for mortgage holders, and we’re working closely with the Financial Conduct Authority, who we know are monitoring it closely.”

The UK’s largest high street banks continue to take advantage of their most loyal savings customers to boost profit margins.

Government insiders said it was too early to state what action by the UK financial regulator might follow, with one pointing out that political pressure alone might push banks to act.

However the FCA told banks in February that under a new “consumer duty” banks will have to act in “good faith in respect of their cash savings accounts” and ensure they are giving “good outcomes” to customers.

The government has said the consumer duty, which comes into effect at the end of July, will represent a “step change” in the way the sector is regulated.

Harriett Baldwin, Tory chair of the Commons Treasury committee, said MPs would be closely watching the banks’ quarterly results.

She added: “The UK’s largest high street banks continue to take advantage of their most loyal savings customers to boost profit margins.”

While rates for savers are coming under increasing political scrutiny, the cost of mortgages continues to rise following poor inflation data and the latest monetary tightening by the BoE, with a number of lenders raising their prices on Monday.

Santander said it would raise rates across a range of its mortgages for new customers by up to 0.46 percentage points.

Rates for existing as well as new borrowers are set to increase at Virgin Money. It said it would raise fixed rates by up to 0.15 percentage points.

Average rates on two year fixed mortgages rose to 6.23 per cent on Monday, up from 6.19 per cent on Friday, according to data provider Moneyfacts. Five year fixed mortgages reached 5.86 per cent, up from 5.83 per cent previously.

Easy access savings rates are averaging 2.36 per cent, according to Moneyfacts. For those prepared to lock away their money for a year, the average savings rate on Monday was 4.61 per cent, up from 4.55 per cent on Friday.

One senior banker said profit margins on mortgages were thin, as low as 25 basis points, adding it was a very competitive market.

UK Finance, which represents the banking and finance industry, said: “Saving and mortgage rates aren’t directly linked and therefore move at different times and by different amounts. Savings rates are driven by a number of factors, not just the Bank of England’s bank rate.

“One key factor is whether someone wants instant access or can deposit money for a longer period of time. Savings rates have increased and we always encourage people to shop around for the product and interest rate that is suited to their needs.”

In a letter to the Commons Treasury committee in April, the FCA mentioned a preliminary consultation that it had started in 2020 about a “single easy access rate” that would be applied across all easy access bank accounts with the aim of addressing concerns about a potential “loyalty penalty” in the market. 

The FCA work was later stopped because of the Covid pandemic, but Nikhil Rathi, chief executive of the regulator, said in the letter to MPs: “We are open to revisiting [single easy access rate]-type measures or considering other more onerous interventions if we later conclude that potential ‘loyalty penalty’ harms that we identify have not been adequately mitigated.”

Hunt insisted again on Monday he would not be making a fiscal intervention to help households cope with higher mortgage bills, warning such a move would simply fuel inflation.

Instead on Wednesday he will bring together regulators covering a range of industries, including energy, telecoms, water, plus the Competition and Markets Authority, to discuss ways to hold down prices for consumers.

Government insiders said there would be a particular focus on food prices, as well as the cost of energy for business customers.