If you’ve been with us for a while, you might recall an article I wrote back in March 2023 that talked all about the problem with “grandfathered” banking products.
Specifically, it looked at the example of ASB’s PrizeSaver account – a “legacy” ASB savings product, which paid such low rates that the interest on my (admittedly tiny, $2) balance every month was being rounded out to zero.
I ended the article with a challenge to the banks to do better by their customers and ditch the practice of grandfathering altogether.
A year later, the PrizeSaver product remains grandfathered, but there is some interesting new legislation in the works (courtesy of the FMA) that’s focused on giving banking customers a fair deal.
Let’s take a look at what’s been happening.
First thing’s first – what’s the go with PrizeSaver these days?
I’m yet to rescue that $2, and that meant I got my latest account statement earlier this month.
It was no surprise to see that my balance is just the same as it was a year ago. Still no interest earned – it’s in the rounding. And I’m yet to win one of the $1,000 prizes on offer to PrizeSaver account holders.
What has changed, however, is PrizeSaver’s interest rate – which was bumped up from the measly 0.20% it was on last March and has been earning 2.25% p.a. since June 2023.
(As an aside, it’s next to impossible to find this anywhere on ASB’s website. You’ll need to search “legacy accounts” to dig up anything about PrizeSaver, or the several other grandfathered savings accounts ASB still has on its books. This is a separate issue of course, but still pretty poor form in my eyes.)
Now, remember, PrizeSaver is a ‘grandfathered’ product. In other words, it still exists, there are plenty of customers who still have this account, but the bank doesn’t sell it anymore. And that means there’s little incentive for ASB to keep PrizeSaver interest rates sharp, because it’s not a product it’s relying on to win new business.
This is why, despite that healthy increase last year, the PrizeSaver interest rate still falls well short of that on ASB’s active equivalent product, the Savings On-Call account - which pays 2.90% p.a.
ASB might argue that it pays less on PrizeSaver because account holders have the chance to win a prize, but by my calculation, the scales are tipped pretty heavily in ASB’s favour here. It pays about $120,000 in prizes each year, which is likely a drop in the ocean compared to the margin it makes on funds held in this account.
Credit where it’s due: it’s good to see ASB bring PrizeSaver’s interest rate more in line with its other savings products. But is the practice of grandfathering fair?
I know what I think.
But to offer a more definitive answer, let’s look at that new piece of legislation – called CoFI, or the Conduct of Financial Institutions regime – that’s currently being developed by the Financial Markets Authority.
Essentially, the new legislation is about ensuring fairer treatment of bank customers, with the introduction of certain “fair conduct” principles designed to prevent everyday Kiwi (who, for the most part, aren’t banking experts) from being taken advantage of by institutions with a lot more knowledge.
If you’re interested in the gritty detail, you can read up all about the new legislation here, otherwise here’s the crux of it, as pulled from the FMA website:
“The fair conduct principle is the overarching principle of CoFI that a financial institution must treat consumers fairly. It is important that consumers get the financial products and services they need throughout their life, when they need them, and have trust and confidence these will do what they should.”
Under the new law, “fair conduct” must be considered at all stages of the delivery of a product or service – including whenever a financial institution designs, offers to provide, provides, or interacts with a customer relating to a particular product or service (like dealing with a complaint or other claim).
So, how do you define “fair”?
The FMA has outlined seven measures of success – outcomes it’s hoping to achieve via this new legislation – and of those, two in particular jump out at me as being most relevant to what we’re talking about here.
- Consumers receive fair value for money – which looks at the exchange of value, and things like pricing relative to benefits, among other stuff.
- Consumers can trust providers to act in their interests – which stresses things like putting the customers at the heart of decision-making.
There’s a bit of a challenge ahead for the FMA in terms of getting agreement and buy-in on its proposed definition of “fair conduct” – and it’s just been through a consultation process with the likes of the banks to get input on this.
With that in mind, how does the practice of “grandfathering” (and the poor pricing banks usually offer on legacy products) stack up?
Does it pass the sense of fairness test? Unlikely in my view, where the pricing is worse than headline products.
But there are some good things in the works on this front. And in my opinion, if the CoFI legislation forces banks to tidy up their grandfathered product suites, that would be a huge win for Kiwi consumers and businesses.
The legislation could also have real implications in terms of how the banks price “like” products relative to one another.
ASB’s Savings On-Call account, for example, pays 2.90% p.a. – while BNZ’s equivalent product, Rapid Save, pays 4.55% p.a. There are differences in the fee structure (ASB has no fees, BNZ offers one free withdrawal per month, then charges $3 per withdrawal) but the base product is much the same. So how come BNZ pays almost double? Is that fair? I’d love to see ASB’s board paper justifying it’s position under the CoFI legislation.
CoFI won’t come into force until 31 March 2025, meaning the banks have about a year to think about how to work their way through this particular problem.
The team here at Squirrel will also comply with COFI. We don’t have any grandfathered products, and I believe all our financial products offer fair value – but if you disagree, I’d love to hear from you.