UK Banks using Funding for Lending Scheme to 'rip off' customers

Banks have been using the Government’s taxpayer-backed cheap credit scheme to rip off customers by cutting rates on savings accounts more than on new loans.

By Philip Aldrick: The claim comes after Andrew Bailey, head of prudential regulation at the Financial Services Authority, told MPs yesterday that interest rates for borrowers had not come down “to the same extent” as those paid on deposits. He said “the jury is still out” on whether the Funding for Lending Scheme (FLS) was delivering what it was set up for.

The FLS was established to provide banks with cheap state-backed funding on around £80bn of loans, reducing their costs by about £800m a year. The gains were supposed to be passed on to households and businesses in the form of cheaper and more available credit.

But by providing an alternative source of funding to customer deposits, savings rates have been slashed since the FLS’s introduction in August. Sylvia Waycot, a financial expert at Moneyfacts, said: “Savers are being persecuted without borrowers getting the rewards. One would hope there will be better deals for borrowers coming through in the next few weeks.”

According to Moneyfacts, the number of savings accounts with an introductory bonus has more than halved to just 11 since the FLS was launched and the size of bonuses paid has also been cut from 2pc to 1.25pc.

Responding to a question from John Mann MP on the Treasury Select Committee, Mr Bailey said: “What we’ve seen since the introduction of the FLS is quite a marked change... in rates paid on deposits. And we are seeing some evidence of rates changing on lending as well. 

“Are we seeing the same sort of adjustment on the lending side – bearing in mind the Government did expect to see that? That adjustment is not taking place yet to the same extent . The jury is still out on whether we’ve seen as much adjustment as you would want to see.”
Bank of England figures show that the average rate paid on fixed-rate bond deposits fell from 2.66pc to 2.12pc between August and December, while two-year fixed rate mortgages for buyers with 25pc deposits decreased from 3.67pc to 3.35pc and two-year fixed rate mortgages for buyers with 10pc deposits dropped from 5.83pc to 5.31pc.
Ms Waycot added that the FLS so far has done little to help get credit through to first time buyers as it has simply lowered borrowing costs for people “who pose no risk”.
MoneySupermarket yesterday said borrowers “are benefiting from cheaper rates” as a result of the FLS. Mortgage rates have fallen and personal loan rates at £7,500 have dropped 1.24pc since the scheme kicked in, the price comparison website said.
A spokesman for the British Bankers’ Association said: “The banks participating in Funding for Lending have committed to ensuring the scheme provides effective results for customers.”
MPs on the committee yesterday also heard that regulators are hoping to encourage new players to come into the banking market. To do this they are investigating ways making it easier for customers to swap from one bank to another and improving the “authorisation process” for new banks. At the moment it can take over a year to receive regulatory authorisation to become a bank, a process that has been blamed for the dearth of new entrants.

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