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Crackdown on banks' sneaky savings trick
The Financial Conduct Authority (FCA) – the UK's financial watchdog – is set to crack down on firms selling fixed-term savings bonds that automatically reinvest into follow-on bonds. This follows a wider FCA review of automatic renewals in which it found widespread evidence of unfair practices and contract terms.
What are fixed-term bonds?
Fixed-term bonds – also known as fixed rate bonds, which includes fixed-rate cash ISAs – are widely sold by banks, building societies and other providers to savers.
Customers depositing lump sums into these low-risk savings products tie up their money for a fixed period in return for a guaranteed, fixed rate of interest. A wide range of bonds is available, varying according to term (usually six months to five years), the interest rate paid, and the minimum and maximum deposits allowed.
During the term of these bonds, early access and withdrawals are usually forbidden, or are penalised by a loss of interest. As the end date approaches, providers contact savers, normally inviting them to choose how to use their maturing funds (which consist of a lump sum plus interest). These options include full or partial withdrawal, reinvestment in another bond or other investment, or transferring their cash to a nominated savings account.
However, many firms operate automatic renewals that deny savers the right to decide before maturity what should happen to their money. Instead of transferring savers' cash into instant-access accounts, these firms reinvest customers' money into new fixed-term bonds.
Why is the FCA worried?
In 2011, the FCA's predecessor the Financial Services Authority (FSA) received a number of complaints from savers about automatic renewal of fixed-term bonds.
Customers protested that, instead of being available for withdrawal on maturity, their funds were being automatically locked into new bonds for further fixed periods. Also, savers were unhappy at some firms introducing mid-term automatic renewal terms that they felt were unfair because they came into effect partway through contracts.
As a result, the regulator began investigating two areas: the fairness of providers' automatic-renewal contract terms and the fairness of firms' practices.
During its review, the FCA contacted 30 providers of fixed-term bonds, demanding details of their contracts and practices regarding automatic renewal. This sample of firms included the UK's largest sellers of savings bonds, plus providers appearing in best buy tables.
The good news is that 14 firms confirmed that they do not operate automatic renewal. The bad news is that the FCA identified concerns about the other 16!
Treating savers unfairly
The FCA found evidence of unfair contract terms and unreasonable company practices at the majority of the firms reviewed. Fortunately, where the FCA raised concerns with these firms, they have reacted positively and taken steps to change their contract terms and/or practices.
The FCA's view was that automatic-renewal terms are likely to be unfair when the interpretation of the term is at the firm’s discretion. For example, a contract term may give the provider the right to reinvest maturing funds into whichever bond it considers 'appropriate' for savers. Of course, what is appropriate in the firm's eyes may not be at all satisfactory to savers simply expecting their money back at maturity.
As a result the FCA has forced firms to amend the wording of their terms to restrict their discretion when automatically reinvesting customers' maturing funds. For instance, funds may only be reinvested into bonds of similar duration and with the same access rights as the original bond.
Looking into firms' practices, the FCA expressed concern about mid-term variations of fixed-term bond contracts to introduce automatic renewal. Where firms had introduced, or planned to introduce, mid-term automatic renewals, the watchdog's view was that such variations would be unfair.
It argued that introducing new features beyond the original terms and conditions "fundamentally changes the nature of the contract". All firms have agreed not to introduce mid-term renewals from this point forward.
The watchdog was also unhappy that some firms offer short notice periods ahead of maturity, not giving savers enough time to make informed decisions. For example, a two-week notice period is no use if a customer is on holiday for that entire fortnight.
The watchdog found similar problems with cooling-off periods, with customers only given a short time during which they could cancel investment in a new bond and withdraw their funds without penalty. In some cases, savers were given no cooling-off period whatsoever. Again, the FCA has instructed providers to give savers reasonable time to change their minds.
Finally the regulator is cracking down on opt-out procedures and the clarity of communications sent to savers. Some firms did not make clear the various options available to savers upon maturity, or how to opt-out of automatic renewal. Again, awkward or unclear opt-out procedures put savers at a financial disadvantage, so the FCA has told firms to improve the clarity of their communications.
They should also explain to savers that automatic renewal is not mandatory and customers are entitled to withdraw their maturing funds.
[Where to earn most interest on your savings right now]
More crackdowns to come
This is by no means the end of the FCA's work into automatic renewals.
Indeed, the financial watchdog is digging even deeper into this murky world, focusing on home and motor insurance policies. The FCA expects to publish this follow-up report in 2014, which could lead to big changes in how home and motor insurance treat policyholders when contracts are renewed.
For example, it could stop insurers from charging renewing customers higher premiums than new customers.
Shop around for top savings rates
Whenever you decide to put money into fixed rate savings bonds, make sure you know exactly what you're getting into. Check carefully to make absolutely sure that you know the bond's duration, fixed interest rate, any penalties for early access, and what your options are on maturity.
As soon as your deposit is made, mark a date in your calendar or diary in advance of maturity. This will be a useful reminder to make sure that you make the most of your funds by always shopping around for the best rate before reinvesting!
