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Regulator to study effect of 'teaser' interest rates on consumer saving habits


The financial services regulator is to carry out an investigation of the £1 trillion cash savings market, as part of a programme of work intended to establish whether competition is working effectively in the best interests of consumers.

Martin Wheatley, chairman of the Financial Conduct Authority (FCA), said that the regulator would consider the impact of 'teaser' interest rates offered to new customers, as well as how often consumers switch accounts, as part of the project. The FCA has a statutory objective to promote effective competition in the interests of consumers in the markets that it regulates.

"We know that switching rates are low for financial services products and savings accounts are no exception," said Wheatley. "Even when people do switch their accounts, they are twice as likely to go with their existing provider than move to the offering of a competitor."

"In looking at cash savings, we will examine an area that affects most people and see if there is action we need to take. This is exactly the sort of area I want the FCA to be operating in," he said.

Market studies enable the FCA to examine competition issues within a particular market, including analysis of how consumers and firms behave and interact. As part of the process it will consider market features including market power held by suppliers, switching rates, problems in the way consumers or firms make decisions and any costs or benefits to third parties. At the end of a market study, the FCA may decide to intervene in that market if its intervention could help consumers.

A market study on annuities could follow before the end of the year, according to Wheatley, depending on the outcome of the regulator's 'thematic review' of the market. The FCA uses thematic views to assess current or emerging risks relating to an issue or product within a sector or market. The regulator will also begin a Wholesale Strategic Review next year, looking at the way competition works generally between financial services firms.

Over 80% of UK adults have some sort of cash savings account according to the FCA, so it is keen to assess whether they are receiving appropriate information and the best returns possible.

Wheatley highlighted 'teaser' rates as an area of potential concern in April, as the new regulator took over the work of the Financial Services Authority (FSA). These rates are offered to new customers for a limited period, usually one year, to encourage them to take out a savings product such as an Individual Savings Account (ISA). Although they can then fall quite steeply, Wheatley said that customers did not often move their money between accounts and could be missing out on better rates elsewhere.

"The smart consumer switches at the end of that year to a new teaser rate," Wheatley said in April, in a speech setting out the FCA's new approach. "What do most people do? - nothing. They stay in these products like a frog boiled in water."

"In too many cases, the honeyed promise of teaser rates fails to match the long-term expectations of customers for financial return. At their worst, they can be the financial equivalent of the Venus-fly trap, enticing consumers towards a product and relying on human inertia to keep them there," he said.

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