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The UK’s financial regulator has set a deadline for banks to justify low interest rates for savers after finding that just over a quarter of recent Bank of England rate increases have been passed on to the most popular deposit accounts.

The Financial Conduct Authority said it would ask the banks with the lowest rates to justify by the end of August how their products comply with a new Consumer Duty mandating “fair outcomes” that came into force on Monday.

“If they are unable to do so, the FCA will take action,” the regulator said as it laid out a 14-point plan to tackle problems in the savings rate market.

Banks have been under pressure from regulators and politicians for bolstering profits by applying interest rate increases to loans far faster than they have passed them on to depositors, although some have recently begun increasing savings rates.

The FCA added that its research showed that instant access accounts, which it said represent 60 per cent of all deposits, had benefited from only 28 per cent of the cumulative 1.5 percentage point increase in BoE rates between January and May.

It found that lenders surveyed had offered instant access savers an average interest rate of 1.25 per cent in May compared with the BoE base rate of 4.5 per cent mid-month.

By contrast, the FCA said 51 per cent of the BoE’s rate increases between January and May had been passed on for fixed-term and notice deposits.

The FCA’s research covered nine of the UK’s biggest banks: Lloyds, HSBC, NatWest, Santander UK, Barclays, Nationwide Building Society, TSB, Virgin Money and the Co-operative Bank.

Smaller lenders were found to offer “higher interest rates on average than their larger competitors”, it added.

Sheldon Mills, the FCA’s executive director of consumers and competition, said the regulator could not force banks to increase rates but would “make our views known and then we’ll consider what actions we can take”.

He added that the FCA welcomed “the progress that has been made so far but this needs to speed up”.

In response to the announcement, Chancellor Jeremy Hunt said: “Banks should be passing on interest rate increases to savers, and we’re keeping a close eye on whether they do. Today’s new ‘Consumer Duty’ gives the regulator the tools they need to take action where that isn’t happening.”

At a Treasury select committee hearing this month the UK’s four largest banks denied charges of “profiteering” and said they had passed on as much as 60 per cent of rate rises in the first half of the year. 

The committee’s chair, Harriett Baldwin, said on Monday that its members had “been pushing for progress on rates for savers all year and this action by the FCA represents more progress”.

She added: “If the £250bn in savings earning little interest can be made to work harder, it will help with the cost of living and help to tackle inflation.”

The BoE raised interest rates by 0.5 per cent in June, but markets are predicting the BoE will increase rates a further quarter-point on Thursday after inflation slowed unexpectedly in June.

The regulator stopped short of imposing a minimum savings rate on banks. It also said it would not revisit proposals shelved during the pandemic that require banks to offer the same interest rates to all customers to ensure loyal customers were not penalised.

But the FCA’s plan includes reviewing how quickly the deposit rates offered by banks move in response to BoE interest rate rises, publishing an analysis every six months of banks’ instant access and reviewing the effectiveness of lenders’ communications with customers on deposit rates.

The FCA wants banks to provide more frequent assessments of whether deposit rates offer fair value and prompt customers earning little or no interest on their money to seek alternatives.

Several banks have raised their savings rates in recent weeks, including HSBC, whose standard rates have increased from 1.35 per cent to 1.75 per cent, and Barclays at the end of June, whose top everyday saver rate rose from 1.00 per cent to 1.51 per cent in mid-July. 

HSBC last week became the first major lender to announce cuts to its fixed-term mortgage rates, following reductions unveiled by smaller lenders a few days earlier. 

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