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UK Savings Market: CACI Interviews the Savings Guru - part one

Tuesday 30 April 2019 AICustomer ExperienceDigital Transformation


Paul Kenny's picture
By Paul Kenny

The UK savings market is more vibrant than it has been for years, with new entrants, a wider product range, rising rates and higher levels of liquidity. Here, Paul Kenny, Director of CACI's Retail Finance Benchmarking division asks Savings Guru founder James Blower for his thoughts on the market in a two-part interview. James has worked with a number of challenger banks, and is a regular commentator on savings for the BBC and The Daily Mail. He runs an information and comparison site for consumers, and is the founder of The Association of Savings Professionals – a group for savings executives.


PART ONE: ISAs, Fixed Savings Products, Market Uncertainty and possible Government intervention


Paul Kenny: If you were Chancellor for a day, what change would you make to the UK savings market?

James Blower: I would reform ISAs. They were introduced back in 1999 to replace what were then PEPs and TESSAs, and the idea of bringing in ISAs was to make saving simpler, and to encourage people to start saving. I think that simplicity has been lost over the last few years particularly. We've now got cash ISAs, stocks and shares ISAs, Alternative Finance ISA, Help to Buy ISA and Lifetime ISA. We've got different allowances for some of those, and we've got Junior ISAs for children. The whole market for ISAs has become much more complex and more complicated, and I think that is putting people off the product.

We now also have the Personal Savings Allowance, which effectively gives a tax-free savings interest income of £500 for higher rate taxpayers and £1,000 for basic rate taxpayers, which negates the need for ISAs for most people. Those changes have been put in place over the last few years, and it's made what were simple products more complex. I would reform ISAs and I would go back to having simplicity in those products, and just make things a lot easier for consumers to understand.


PK: What’s your view on the fixed rate market? Have we hit the trough, and is the market ripe for a renaissance?

JB: The facts on this can't be disputed, services like Retail Finance Benchmarking at CACI and UK Finance figures say that the volumes of savings in fixed rates is falling, and the volumes in the longer term fixed rates particularly are impacted. People are moving more towards the shorter term. The situation isn't as bad as some of the figures say because some of the smaller banks are excluded from those figures, either out of choice or by not being significant enough to be reported on.

We have probably reached the trough. Uncertainty is forcing people to use the shorter term – the price differential just isn't there now. Instant access has been hovering around 1.5% for savers for seven or eight months now, and if we take fixed rate bonds of one year as the first step-up point, we've been in the range of 1.95% to 2.1-2.15% for a similar period. That's not a big differential to tie your money up for. Going to the other extreme, five-year money has been just north of 2.5% for a reasonable period too. A 1% premium for tying your money up for five years isn't generous, and neither is a 0.5% premium over instant access for tying it up for a year. We're seeing consumers say: 'absolutely not enough reward there', which is why I think we're at the trough.

We will see those rates shift up a slightly as new players come into the market. There's not quite enough appetite there from the existing players in the market to provide that impetus to push rates upwards, but I think we've got some reasonably big players coming who will have the desire to help push rates forward.

A higher-rate environment will drive greater change to customer behaviour, but not to the levels that some might hope for.

James Blower, Savings Guru

PK: Savers have continued to invest in accounts at rates below Base Rate. Would you agree that a higher-rate environment would be the largest driver in customer behaviour?

JB: A higher-rate environment will help drive consumer behaviour, but this isn't a new problem. The real question is why we're not seeing a shift away from the vast majority of cash in the savings market sitting with seven larger providers, who hold about 70-80%. Some of that is rate-driven – as we covered in the previous conversation about fixed rate savings, the differential isn't there now.

Rates generally are low compared with inflation so some of the inertia is driven by where the market is now, and that would be helped by a higher-rate environment.  If we roll back to the early noughties, we had providers come into the market from abroad offering better rates, and they attracted a lot of money, but at similar levels to what's happening now, and we didn’t see everyone desert the big banks and go rate-chasing. We saw a big shift in customer behaviour, but it didn't materially alter the market and we could see similar behaviour in a higher-rate environment now. We'd see more people shifting but it wouldn't fundamentally change the situation because the bigger players would just increase their rates. They wouldn't increase them quite so high, but they would follow suit to a degree.

You and I are probably old enough to remember when bonds were about 7% for one-year terms and you got 4%, maybe 5%, on instant access. We’re a long way away from those heady days, but in that environment, you had some of the big players paying 2-3% on instant access and paying maybe 4-4.5% on bonds, and customers were happy to take that. They valued the security, they thought it was a reasonably attractive rate of return, and behaviourally they didn't change as a group in significant numbers.

So I think it would be a similar situation again. A higher-rate environment will drive greater change to customer behaviour, but not to the levels that some might hope for.


PK: Do you think the increase in the savings market is being driven by Brexit uncertainties, and what effect are lower corporate investment flows having?

JB: I think we are seeing consumers steering more towards shorter term easy-access products and shorter term fixed rate bonds. We're seeing reduced amounts of money in longer term fixed rate bonds, and a reluctance for people to tie their money up for longer periods of time. Some of that is Brexit-related, but there's also uncertainty generally in the market now.

On the corporate side it’s not too dissimilar, businesses like certainty. They’re generally quite resilient and can base their plans on the worst-case scenario, but I think the lower corporate investment flow reflects business not liking the current climate of not knowing what is going to happen. Businesses would prefer to have the certainty of knowing that something not particularly good is going to happen, rather than not knowing what is going to happen at all – that’s what's causing the low corporate investment base. Those companies are just sitting tight now, waiting to see what does actually happen.

If I was asked for a percentage likelihood I'd say government intervention is only 20-25% likely.

James Blower, Savings Guru


PK: Do you think the government will have to extend the Term Funding/Funding for Lending Schemes, given the scale of the refinancing relative to savings growth and wholesale market capacity post-Brexit?

JB: This is an interesting one, good question! The government intervened in the first place to help the banks and the requirement was ultimately to help consumers and for me, that's gone. There isn't a need to help the banks and the building societies further or to provide additional support to consumers, which suggests it won’t be repeated or extended.

However, what we have got is a potential cliff edge coming up, with substantial refinancing. Does it make sense to allow the market to take care of that? There are some reasons why the government might want to intervene and just taper that off a little bit.

There's potentially a perfect storm coming, with a peaking of new banks entering the market in mid to late 2020, a rising rate environment, and building societies having to come back into the savings market if they want to continue to grow. Some of the bigger providers in the market are also having to look at that. Add all that together and that is potentially quite exciting for consumers, in that they'll be seeing greater choice and more price competition, but it’s not necessarily ideal for providers.

Whilst there's no consumer need to do it, I could see the government intervening with some sort of extension - or a third thing - just to take the heat out of that perfect storm.

If I was asked for a percentage likelihood I'd say government intervention is only 20-25% likely. However, the longer we go on with the Brexit scenario the more likely it becomes, because there's a lack of business focus on the domestic agenda at the moment. My gut feeling is that it won't happen, but equally I wouldn't be surprised if there was some intervention there.


PK: Does having too many new providers raise concerns of financial risk?

JB: There are two elements to that question: whether it raises concerns for the regulators, and whether it creates an issue for consumers.

On the regulatory side, I think the regulators are still reasonably keen to encourage more entrants. I think they would probably like to see more providers come into the market who are not just adding to what's already there, but are trying to do things that are different or to fill gaps in the market that haven’t been plugged by the new entrants. There have been 43 new entrants to the savings market since 2009.  A substantial amount, but if you look collectively at what they are looking to raise in the market, they are only taking care of the growth in the deposits market, and they don’t have the appetite to take money away from the big banks.

From a consumer perspective, they will welcome more choice. The regulator would be happy to see the influx of new banks start to tail off a little bit now, and become more focused on those that are bringing something genuinely new to the market rather than just coming in and playing alongside the existing space that other players are already in.


Read Part Two

Part two of the interview covers M&As, Consumer Behaviour, Open Banking and the Impact of AI - read it now.

The UK savings market is more vibrant than it has been for years. Here, we ask Savings Guru founder James Blower for his thoughts on the market in a two-part interview. Read part one.

UK Savings Market: CACI Interviews the Savings Guru - part one


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