Should teaser rates on savings accounts be banned?
YES: JAMIE STINSON, STAFF WRITER, MONEYWISE
Introductory saving rates can benefit some savers, mainly those who are more financially savvy and have a better understanding of savings products. The problem is these people are in the minority.
I firmly believe the majority of savers suffer because of these rates. They see a higher rate when they first open an account and believe they are getting a good deal. But few realise so-called ‘teaser rates' are only temporary, and chances are they'll end up stuck with a savings account that will pay well under 1% for however long they have it.
This is a part of a wider problem in the financial services industry in general, that those who don't understand the finer details of specific products get punished for their ignorance.
Many savers simply don't understand the jargon banks use to sell their products, as the language is frequently complex and can easily be misconstrued. Teaser rates, coupled with other instances of poor practice such as mis-selling scandals, only add to the distrust many consumers have of the financial services industry.
Banks talk about making things simple for consumers but the very idea of teaser rates is the antithesis to a simple financial product. The majority of best buys now come with a teaser rate or bonus, cloaking what will inevitably become a very poor rate.
For example, at the time of writing, the AA Internet Extra (Issue 13) offers a rate of 1.5% but it comes with a 1% bonus paid after a year. After the 12-month period is up, the rate savers will be stuck with droops to a rather miserly 0.5%. And it's important to remember this rate can drop further still – and most likely will – the longer you have the account.
Another key reason teaser rates should be banned is that even if consumers know the savings rate will fall, inertia prevents them switching - all too often, they leave their money in the same account and forget to transfer it into one with a better rate. This is exactly what the banks rely on and how they get away with such shoddy rates.
It is only the savers who switch regularly, are in the best paying accounts and are aware of the devious tricks banks use to lure you in, who benefit from teaser rates.
When the Financial Conduct Authority announced it was launching a market study into the cash savings market and teaser rates in September, its chief executive, Martin Wheatley, said: "We know switching rates are low for financial services products, and savings accounts are no exception. 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."
Without people switching, they are unable to gain any benefit from the teaser rate on their account. Instead, the only thing they will be switched to is a lower saving rate once the bonus is paid.
This is why teaser rates should be banned, as they leave unassuming consumers thinking they have their money in a account paying a good rate when this isn't the case.
Teaser rates trick savers and punish them for their ignorance.
NO: ANNA BOWES, DIRECTOR OF SAVINGSCHAMPION.CO.UK
Bonus savings accounts have come in for a lot of stick, offering savers an inflated rate of interest but only for a short period of time – usually 12 months. The main concern is about the number of savers sitting in poor paying accounts as they have "forgotten" to move their money at the end of the bonus term when rates often plummet.
It is widely reported that the bonus account is effectively a trap, which prays on savers' inertia. Inertia is a huge problem for savers but it's not just bonus accounts that create this problem. As a rule, the longer you ho"ld a savings account the more likely you are to see the rates dwindle.
When bonus rates first became popular many years ago, they represented such a small proportion of the overall rate on offer that once expired, the rate drop was rarely considerable. Instead, the issue that savers faced in the early days of bonuses was the short amount of time they actually lasted for; many were just a few months – and sometimes just days.
But, over the years, bonuses grew to such large levels that they often offered savers more in interest than the underlying rate. Bonuses of up to 3% were common in 2012, with many underlying rates standing at just 0.5% (the current level of the Bank of England base rate).
However, bonus accounts aren't all bad. The majority of bonuses are fixed (and therefore can't be reduced). As savings rates on existing accounts have tumbled over the past 18 months bonus rates have been a bit of a blessing, guaranteeing savers a hefty amount of extra interest.
And for savvy savers who have the time and inclination to switch when the bonus is due to end, these can be an extremely useful tool to help squeeze as much interest as possible out of a savings account.
Following the introduction of the Funding for Lending Scheme, competition disappeared and providers started a race to the bottom of the best-buy tables. As a result, perhaps unsurprisingly, bonus rates all but disappeared – to be replaced instead by accounts that restrict the amount of penalty-free withdrawals that are allowed.
It could be said that bonus rates are a bit like Marmite – some love them and others hate them. But what is likely is that if the bonus is outlawed, providers will find another way to bamboozle savers and project themselves to the top of the best-buy tables with alternative tricks.
So perhaps it's a case of "it's better the devil you know".
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.