Metro Bank Misleading Customers ( maybe breaching advertising standards )

groovyclam

Hi, I'm a newb so be gentle.

Metro Bank are looking for liquidity and are thus offering a 1 year fixed term saving account with attractive interest rates (no access once you put your money in).
They offer it in two versions: either interest paid in 1 blob at the end of the year or interest paid monthly.

The rates they quote in their paperwork are:
Yearly Interest = 5.91 Gross / 5.91 AER
Monthly Interest = 5.76 Gross / 5.91 AER

NOW HERE's THE PROBLEM - if you put 5.76 gross into a 12 monthly calculator for 1 year then the  AER does indeed come out at 5.91 AER. 

HOWEVER the interest on the monthly paying account is NEVER paid into this actual savings account i.e. It is not paid into the account with the initial investment sum in it. Instead Metro Bank pay the monthly interest amounts into either your Metro Current Account, if you have one, or they open an Instant Access Saver Account of rate 2.22 AER to pay them into. The upshot is the 5.76 Gross you get each month is not going to compound at the same rate as the 1 year fixed term rate account.

Therefore, as I understand things ( being an investment newbie ) it would be impossible to get 5.91 AER from this monthly paid interest account.

Am I correct in my above thinking ? Is my AER not in fact jus the 5.76 gross that I get paid each month into my current account ? And if so aren't Metro Bank breaching some sort of advertising standards ?

wmb194

groovyclam said:

Hi, I'm a newb so be gentle.

Metro Bank are looking for liquidity and are thus offering a 1 year fixed term saving account with attractive interest rates (no access once you put your money in).
They offer it in two versions: either interest paid in 1 blob at the end of the year or interest paid monthly.

The rates they quote in their paperwork are:
Yearly Interest = 5.91 Gross / 5.91 AER
Monthly Interest = 5.76 Gross / 5.91 AER

NOW HERE's THE PROBLEM - if you put 5.76 gross into a 12 monthly calculator for 1 year then the  AER does indeed come out at 5.91 AER. 

HOWEVER the interest on the monthly paying account is NEVER paid into this actual savings account i.e. It is not paid into the account with the initial investment sum in it. Instead Metro Bank pay the monthly interest amounts into either your Metro Current Account, if you have one, or they open an Instant Access Saver Account of rate 2.22 AER to pay them into. The upshot is the 5.76 Gross you get each month is not going to compound at the same rate as the 1 year fixed term rate account.

Therefore, as I understand things ( being an investment newbie ) it would be impossible to get 5.91 AER from this monthly paid interest account.

Am I correct in my above thinking ? Is my AER not in fact jus the 5.76 gross that I get paid each month into my current account ? And if so aren't Metro Bank breaching some sort of advertising standards ?

No, that's how you compare them, with AER. IIRC it's based on guidance from the FSA but I cannot easily find it. You can compound the interest, just in another account. You could even do better e.g., if you compound the interest in a 7% regular saver.

groovyclam

I pointed this query out to both a counter operator who was opening the account for me at Metro and he had tocall over the branch manager and she couldn't explain it either. I have a query lodged with some sort of back office team at Metro Bank but I doub't I'll ever hear anything from them.

ColdIron

groovyclam said:

Am I correct in my above thinking ?

Yes, it will not compound at 5.91%

However Metro are not misleading anyone. They are required, as are all banks and building societies, to quote the AER to allow easy comparison of savings products. They have no choice

It's a common situation with providers that pay interest away. E.g. NS&I Guaranteed Income Bonds, Barclays Rainy Day Saver, Santander Edge Saver etc

groovyclam

Thank you for all your explanatory comments.

It seems a nonsense that AER is used for accounts that pay interest away as you can therefore not just compare AER rates !

friolento

groovyclam said:

Thank you for all your explanatory comments.

It seems a nonsense that AER is used for accounts that pay interest away as you can therefore not just compare AER rates !

What else would you use to compare savings accounts?

groovyclam

friolento said:

groovyclam said:

Thank you for all your explanatory comments.

It seems a nonsense that AER is used for accounts that pay interest away as you can therefore not just compare AER rates !

What else would you use to compare savings accounts?

Well in the case I am describing ( where interest is not paid into the savings account ) it has been given an AER of 5.91 but in effect is it only 5.76. 

So something needs to change to calculate AER rates for accounts that do compound interest and maybe calculate AER rates differently for those that don't. 

As I said, I am a newbie, and I was thinking through all the spiel from Metro counter staff and their advertising flyers that I was set for a nice AER of 5.91 it was only when the counter man started mentioning that the interest wasn't going to be paid into the same account as the saved sum that warning bells started going off in my head.

As, I said further up, neither this man nor the lady branch manger he called over could prove to me I was going to get 5.91 AER ( because I can't if the interest is paid into a different account ). They were both left flummoxed as to why the advertising paperwork said that it did. ( Great training there Metro Bank ).

Just because the way current AERs are calculated doesn't mean they can't change the rules to make situations like this into account to make sure a bank can't advertise and AER of 9.1 that is clearly impossible to reach. It's tantamount to lying as far as I am concerned.

AmityNeon

AER is advertised with the standard footnote:

AER stands for annual equivalent rate. It shows what the interest rate would be if interest was paid and compounded once each year.

Should providers make it explicitly clear whether a specific account can achieve published AERs? Yes, but they're not compelled to do so.

ColdIron

groovyclam said:

friolento said:

groovyclam said:

Thank you for all your explanatory comments.

It seems a nonsense that AER is used for accounts that pay interest away as you can therefore not just compare AER rates !

What else would you use to compare savings accounts?

Well in the case I am describing ( where interest is not paid into the savings account ) it has been given an AER of 5.91 but in effect is it only 5.76.

That's how AER works. If you don't understand how AER/Gross works have a read of this

https://www.moneysavingexpert.com/banking/interest-rates/

So something needs to change to calculate AER rates for accounts that do compound interest

That would be the AER, it's 5.91% the same as the gross rate. Since you receive 5.91% it's difficult to imagine what else they could use

and maybe calculate AER rates differently for those that don't.

Then it wouldn't be the Annual Equivalent Rate

You could just use the Gross rate as they are clearly different but then you wouldn't easily be able to compare two different accounts with differing payment mechanisms. That's what AER was created to address

It's tantamount to lying as far as I am concerned.

No one has lied to you, you just don't understand AER, many do not, read the link above

lindabea

I think I can understand what the OP is saying and I'm inclined to agree.  In this case, I think Metro are promoting misleading information.  AER stands for annual equivalent rate for comparison reasons.  But in this case stating that the % rate for annual interest is the same as the monthly interest rate is wrong.  It would ONLY be correct if the interest is paid to the savings account, but since it isn't the total interest received at the end of the 1 year is at a rate of 5.76% and always on the capital sum originally invested.  Therefore, you are not receiving any compounding effect due to the interest being paid out,

That said, I accept the point that you can invest the interest elsewhere and possibly earn a higher interest rate, but that is not the same as saying that you are receiving 5.91% interest by having a monthly interest account.  So you are not comparing like with like.   

eskbanker

I'm not sure there are many more ways of saying it, but AER is a notional rate, and not necessarily one that's actually achievable on any given product, especially short term (<1 year) fixes, so it's essentially an artificial (but well-defined) concept.

Anyone looking to compare accounts that will only pay away interest can compare on gross rate, but they'd all use the same conversion process to AER, so comparing via AER will still give the same indication of relative performance across multiple providers.