The Funding for Lending Scheme (FLS), which was designed to offer cheap loans to banks and building societies, has sent interest rates on savings accounts plummeting.
This means it's almost impossible for savers to secure a decent rate on their cash.
In 2012 alone 351 savings accounts were withdrawn from the market, according to Moneyfacts.
The mistakes of Funding for Lending
Andrew Bailey, a senior member of the Bank of England, admitted this week that banks had cut rates for savers after the £80 billion scheme was introduced last summer.
It was created as an incentive to boost lending levels by giving UK banks and building access to cheap loans. These rates are meant to be passed onto customers in the form of cheaper mortgage rates.
But because lenders can borrow money at reduced rates, there is less need to get money from customers in the form of savings. And that's why savings rates have plunged downwards.
On the mortgage front things don’t look too positive either. Bailey also said “the jury is still out” on whether the UK has seen as much adjustment to lending rates as was expected.
At the latest count, 35 banks and building societies had joined up to the Funding for Lending scheme. These include most of the high-street brands, with some exceptions, such as HSBC.
Falling savings rates
The number of savings accounts paying above the base rate of 0.5% fell by 304 last year 162 of these disappeared from the start of November.
Saving accounts including ISAs
Savings accounts paying above base rate
Savings accounts paying below base rate
“Providers are no longer just cutting savings rates as they were a month ago, they are now pulling entire products as they find that constantly reducing rates is not enough to remove them from best buy tables,” explains Sylvia Waycot, spokesperson for Moneyfacts.
There doesn’t seem to be any let-up from these dismal rates either, because the scheme has an 18-month window where providers can borrow money and four years thereafter to lend the money out.
Unfortunately the dropping rates don’t just apply to providers which are part of the scheme. Waycot says lenders which are normally in the middle of the tables have now found themselves with market-leading products. In response these rates have been slashed or removed.
Michelle Slade, spokesperson for Nationwide, said the building society “considers the rest of the market when settings savings rates and has revised its pricing in response to competitor movements".
What do the lenders say?
Although Bailey has said the scheme is directly linked to falling rates, some of the larger banks are reluctant to admit this.
Santander spokesperson Nicola Hussey said the scheme had not caused the bank to reduce the rates on instant access savings accounts. She highlighted that a bank can only borrow the equivalent of 5% of its existing loans through the scheme, meaning there is still a reliance on savers to provide a substantial amount of the money it lends out.
A spokesperson from the Lloyds group also shied away from making a link to Funding for Lending and said savings rates “are determined by a number of factors, including market conditions”.
But smaller lenders, which are also signed up to the scheme, were more forthcoming.
Andy Lucas, spokesperson for The Cambridge Building Society, said: “As a result of Funding for Lending and the desire to support borrowers, rates for short and long term savers have fallen across the market.”
The message was the same from Tracy Fletcher, spokesperson for Skipton Building Society. She said the scheme “does appear to be impacting on the rates available to savers”.
Paul Winter, chief executive of Ipswich Building Society, agreed though he said it’s mainly larger banks which have reduced the rates on offer.
What can savers do?
Unfortunately there is little savers can do at this stage.
When it comes to instant access accounts the best rate you can get is 2.10% from The Post Office. It’s not much better for one-year fixed bonds, with the top rate at 2.55% with BM Savings, although this requires £25,000 to open.
The best thing to do is keep an eye out for high rates and act quickly if they are released.
Other options to consider are peer-to-peer lenders which are currently giving away higher interest rates to savers.
Some current accounts, such as the Santander 123 account, are also offering rates which rival most instant-access accounts around. It pays 3% on balances of £3,000 and as the cash is in your current account you have instant access to it.