Savers Expected to Rejoice as Funding for Lending Scheme Finally Closes

By: MoneyFacts

Savers may be getting ready to celebrate the end of the Government’s Funding for Lending Scheme (FLS) tomorrow, as its effects on the market have been felt for over five years. When it arrived, savings rates plummeted to alarming levels as many banks and building societies took advantage of the scheme, and stopped working hard to entice savers’ deposits.

In fact, the latest research by moneyfacts.co.uk shows that the average return on an easy access account has more than halved since the FLS was introduced, falling from 1.03% in July 2012 to 0.48% today. A similar drop can be seen in fixed rates, with the average one-year fixed bond falling from 2.57% to 1.18% today. Long-term savers will also find the average five-year fixed bond fell by almost 2% over the same period, from 3.88% down to 1.96% today.

Although the FLS clearly damaged the savings market throughout its term, consumers will have to endure at least another four years until the funding finally runs dry, due to the Term Funding Scheme (TFS) launched in 2016.

Rachel Springall, Finance Expert at moneyfacts.co.uk, said:

“The introduction of the FLS back in July 2012 allowed banks and building societies to draw funds from August in the same year, resulting in the floor being pulled away from under the savings market practically overnight. While one might expect its imminent closure to be a good thing, it’s not that simple. Its legacy was extended with the launch of the TFS back in August 2016, allowing funds to be drawn from September 2016, further fuelling the negative impact on the savings market. In addition, while the TFS is open for drawdowns until the end of February 2018, banks and building societies will have up to four years to benefit from the funding, which takes us until 2022. Therefore, savers have quite a wait ahead for the market to rejuvenate.

“Although savers face a few years of further disappointment, there have been some success stories away from the major banks and building societies, in the form of the challenger banks. Undeterred by the lack of competition in the market, the challenger banks have entered the fray and have frequently reigned supreme in the savings Best Buy tables. These banks are making every effort to offer savers a competitive return by closely monitoring the flow of cash into the business. They also need to build their trust with anxious savers, who may be deterred by the newness of the brand – but this does take time.

“More recently, a bit of hope surfaced in the market as rates have improved since a year ago, but this was largely down to competition from challenger banks and a small rise in the Bank of England Base Rate. Still, looking back over the last five years, savers could have lost half of their return depending on the investment. As an example, if someone invested in a five-year fixed bond today, they would be missing over £2,000 in interest on average after the term is up, compared to if they had invested in 2012, so this shows the severity of some rate cuts*.

“With all this in mind, savers would do well to keep a close eye on the Best Buys and consider more unfamiliar brands to boost their cash returns, especially as the savings market won’t be bouncing back for quite a while.”

*Interest compounded yearly, £4,193 earned on £20,000 based on a rate of 3.88% fixed, after five years. Return on 1.96% is £2,038.35.

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