Occasional Paper No. 41: Price discrimination in the cash savings market: One rate, one solution?

The Cash Savings Market Study found that the cash savings market is not working effectively for many consumers. Significant amounts of easy access cash savings sit in accounts that were opened a long time ago, earning lower interest rates than those opened more recently. The FCA is exploring ways to improve these market outcomes.

Occasional Paper No. 41 (PDF)

Summary

The original publication of OP41 included an algebraic error that was also present in the modelling code. This has been revised, shifting the original policy impact from £150m-£479m to £148m-£381m. Other changes include a correction of a small number of typos. These are listed in the table below.

Page

Description of change

3

Revised impact estimates: £148m-£381m (median estimate is £261m)

5

Revised impact estimates in main text and footnote 5.

16-17

Amended several typos in pages 16 and 17

19

Figure 6 revised to reflect updated impact estimates.

20

Figure 7 revised to reflect updated impact estimates.

Text in last paragraph updated with new numbers.

Annex 2

Page 27: Amended the first order condition for the BSR

Annex 4

Page 29: corrected typos in equations 2 and 3.

Page 30: equations 5 and 6 rewritten in a simpler format, consistent with code.

Page 31: corrected typos in Table 5.

Page 32: Table 6 revised with updated model outputs. Text below the table revised to reflect these changes.

Page 33: Figure 8 updated with model outputs. Table 7 corrected for typos.

Page 34: Table 8 revised with updated model outputs.

Throughout the OP

The rate is now called Single Easy Access Rate (SEAR), consistent with the Consultation Paper

We have revised this paper since its first publication to correct some of the calculations.

This paper explores the likely impact of a potential supply-side regulatory intervention. The potential intervention, called the single easy access rate (SEAR), aims to enhance competition and improve consumer outcomes by delivering more uniform pricing across cash savings accounts. It requires firms to have a single interest rate onto which a cash savings account reverts after a certain period of time (eg after a year). Firms are able to set this rate freely (in compliance with applicable legal requirements); the only restriction is that they cannot discriminate by account age.

To simulate the policy impact of the SEAR, we apply a well-established model from economic literature to the data on the cash savings market. We find that the BSR is expected to result in a higher overall interest paid on easy access savings balances, as price-sensitive consumers are pooled with less sensitive ones – helping to ‘protect’ the latter. There is some waterbed effect because the overall higher interest rates for longstanding ‘back-book’ customers lowers the profitability of this customer group for firms, which reduces the ability and incentive for firms to pay high introductory interest rates for new ‘front-book’ customers.

The model predicts that, under the BSR, firms would pay a slightly higher overall average interest rate to their customers, adding up to a net increase of between £150 million and £380 million (median estimate is £260 million) per year for the market total. The estimate takes into account the waterbed effect, so the benefit for back-book customers is larger than this but offset by the losses to the front- and mid-book customers. The model also quantifies the equilibrium price changes and market shares for small vs large firms.

Other aspects of competition are not quantified, such as increased price transparency that may enhance demand pressure, or those resulting from increased confidence in the cash savings market. These more detailed points, along with a wider range of remedy options, are discussed in the Discussion Paper DP18/06.

Authors

Gaber Burnik and Tommaso Majer.

Disclaimer

Occasional Papers contribute to the work of the FCA by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence that the FCA may use while discharging its functions and to inform its views. The FCA endeavours to ensure that research outputs are correct, through checks including independent referee reports, but the nature of such research and choice of research methods is a matter for the authors using their expert judgement. To the extent that Occasional Papers contain any errors or omissions, they should be attributed to the individual authors, rather than to the FCA.

Go to related content