The worst offender here is Virgin Money. It pays a shockingly mean 0.25% on its everyday saver account. Go to the website (or perhaps don’t), and you will be told the upside of the 4 percentage-point gap between this and the rate commercial banks can get at the Bank of England: You get the “freedom to pay money in and take it out whenever you want.” Hmm.
The big four banks in the UK — Barclays Plc, HSBC UK, Lloyds Banking Group Plc and NatWest Group Plc — aren’t serving you much better. Their instant access rates are knocking around 1%. The Treasury also wrote to them a few weeks ago.
The banks that have responded so far have mostly pointed out that they have other products people can use so there isn’t a problem. There is. None of these are instant or easy access. Virgin has an account that can give you a rate of 4.2%, for example, but if you put your money in, you can’t get it back for two years.
Other banks will offer higher rates but claw the gain back by making you have a current account with them too. Go to Barclays and you can have 5.12% on £5,000 ($6,309) worth of savings. That’s nice — except that to get in on the deal, you need to have a current account and be in its Blue Rewards Scheme – which means paying in £800 a month and a £5 a month fee. Oh, and after £5,000, the rate goes down to 0.65%.
Other offerings rely on clawing back the spread via by playing on our admin phobia. We might drag up the energy to change accounts once, but probably not twice. Lloyds has a classic of the genre amid its offerings — an account that offers 2.7% but which auto transforms to a Standard Saver Account after one year. The interest rate on the Standard Saver is 0.85%.
You know how governments have nudge units to make you do the right thing? Who would be surprised to find that Lloyds has the opposite? Call it an apathy unit — one that works on the reasonable basis that as long as any financial harm isn’t too screamingly obvious, most customers will take that harm over making a change that involves filling in a form.
Nationwide has an account that is a little less awful though still not ideal — it pays 3.2% but only allows three withdrawals a year (more than this and the rate falls to 1.25%). It’s true that some new entrants to the market have better offerings. But you get the idea. There is a lot of clipping going on.
This is not new behavior from our deposit takers. Look to the historical rates paid by building societies since the 1930s, and you will note that while they are sometimes less than inflation (in the 1960s and 70s, for example), they are almost always less than the bank rate.
The banks are not the only meanies either. Look at the investing platforms where lots of us hold cash. Most now have some kind of special home where you can lock your money up and get goodish rates — but if you leave the money just sitting in your account, you’ll be lucky to get much over 1% on it. They will tell you clipping keeps trading prices down for everyone, but perhaps you don’t think it is your job to subsidize frequent traders (it probably isn’t). So you will want to take some action — or, as the Treasury Committee suggests, “vote with your feet.” That means changing bank accounts and picking up better offers, but it also means looking at other options.
Enter money market funds — open-ended funds that hold cash and short-term government and corporate bonds with a view to producing a low-risk return just over a benchmark such as the BOE base rate. These have been of no interest to UK savers for years: No one moves their money for less than one percentage point. However, when the difference is more like three percent, it turns out they do.
In this year’s ISA season in the UK, demand boomed: Interactive Investor has, for example, seen a sharp rise in demand, with the Royal London Short Term Money Market (which yields 4%) being a new entry to the platform’s top 10 most-bought active funds in April.
Money market funds aren’t the same as bank accounts, of course. There might be very little obvious risk to your capital, but there is always some. Even the lowest-risk companies can go bust — and there is no Financial Services Compensation Scheme deposit protection on a fund. There are also occasional liquidity issues in the sector (when everyone tries to sell at once, for instance). But still, you get 4% from a diversified portfolio (no single bank risk here) and you can trade in and out whenever you like.
If I was running a big bank in the UK, the Treasury Committee was on my case, and I saw that £11 billion was pulled out of UK bank accounts in March — something that may well have been prompted by the SVB bankruptcy but which also clearly shows that apathy has its limits — I might start having a little think about my deposit rates. No one wants to see a gentle drift of withdrawals turn into a flood.
More From Bloomberg Opinion:
• The Bank of England Should Avert Its Gaze From the Rear-View Mirror: Marcus Ashworth
• The Hole Where Britain’s Ambition Used to Be: Matthew Brooker
• A Drone Superhighway Gets the UK Where It Needs to Go: Dave Lee
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion, covering personal finance and investment, and host of the Merryn Talks Money podcast. Previously, she was editor-in-chief of MoneyWeek and a contributing editor at the Financial Times.
More stories like this are available on bloomberg.com/opinion
