Metro Bank Misleading Customers ( maybe breaching advertising standards )

ColdIron

lindabea said:

In this case, I think Metro are promoting misleading information. 

Then you would have to concede that all banks and building societies are promoting misleading information

But in this case stating that the % rate for annual interest is the same as the monthly interest rate is wrong.

No, it's right, because the AER is the same

AER is a hypothetical rate (the equivalent in AER) for use in a comparison and nothing more. It is not a contractual rate

The Gross rate is the contractual rate, the one that they are bound to pay you and they are different

AER shows what the interest rate would be *if* interest was paid and compounded once each year. They are required to disclose that figure, they have no choice. If you have an issue perhaps approach the regulatory body that requires them to quote it

Albermarle

They were both left flummoxed as to why the advertising paperwork said that it did. ( Great training there Metro Bank ).

To be fair to Metro, it is worth pointing out that on the forum we see numerous examples of bank/building society/financial providers customer services providing inaccurate info on many topics, or just being totally unaware of some points.. For sure Metro are not alone with this problem.

BooJewels

I typed this up once, but the post vanished, so I'll try again.  It's happened several times in the last few weeks.

Perhaps the better way to look at it, is that you don't actually get paid 5.91% either.

If you were to put in £1,000 in an annual interest account - it would actually pay interest at the rate of 5.76% annual interest, but worked out per day.  So you'd get 15.78p per day and in the first month, if it had say 30 days, that would be £4.73 added to the account balance at the end of month 1.  In month 2, you'd now get the daily interest of 15.86p, as it's on a balance of £1,004.73.  So if in the second month there were 31 days, you'd get £4.92 added - a bit more than last month.  Once you'd done that 12 times over the year - you'd end up with £59.10 in accrued/compounded interest - which is EQUIVALENT to 5.91% on £1,000, at the end of the term - hence the quoted AER.  Others have already explained why it's quoted by all financial institutions in this manner.

It may not be quite that simple, it may be accrued or calculated daily, but that's the difference between the quoted monthly and annual rates and the effect on compounding.

[Deleted User]

lindabea said:

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.   

Thank you lindabea for understanding what I am getting at.

As a newbie I understand AERs are a means of comparing products.

So if I see one saving account with a rate of AER higher than another account I know I would be better off with the first account.

I'm new to the forum so can't post links or pictures, but Metro Bank's Flyer has the accounts described like this:

Term: 1 year     

annual paying out interest = 5.91% AER, 5.91% Gross

monthly paying out interest = 5.91% AER, 5.76% Gross

So I initially assumed both accounts would give me the same interest because they both showed the same AER. It wasn't until I realised the monthly interest wasn't being paid into the investment account but another separate account and thus was not being compounded that I realised the quoted 5.91% for the monthly interest account was impossible ( unless I personally take control and look for somewhere else to move that monthly interest to make it work for me ).

Neither the bank teller selling me the account, nor the Metro Branch manager could explain why both accounts had  the same AER of 5.91% written against them when clearly the monthly paying account could not achieve this. This made me very nervous and I felt like a bit of underhandedness was now going on but couldn't understand what.

The FCS may be sitting pretty with saying AER's may mean this or may do that, but frankly that's of no use to someone like me ( or horrors - someone who is less aware than me how investing works ). The FCS should be bringing out a new rule/calculation that says EXACTLY what interest an account makes in a year and that new rule/calculation should also cover accounts like this which don't pay the interest into the original investment account but pay it elsewhere ( thus it is not compounded ).

Surely the Metro Bank monthly interest account should be advertised as 5.76% Gross, 5.76% AER since that is exactly what you would have at the end of the year ( if you let the interest sit in a 0% growth account as it was paid out monthly ) ?

BooJewels

I haven't seen the flyer you're quoting, as I'm not a customer, but their web page  actually looks like this:

1 year Fixed Term Savings account

Annual 5.91% gross/AER* fixed

Monthly 5.76% Gross/ 5.91% AER*

The key bit being the asterisk which then says:  

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

Gross rate is an annual contractual rate which is calculated daily and paid out at a frequency applicable to the product.

[Deleted User]

AmityNeon said:

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.

I think that really needs to change in law then. You shouldn't be allowed to quote an AER that is impossible to achieve if the interest is paid elsewhere ( i.e. not compounded ). This is exactly my problem with Metro Bank's advertising of the account - it's telling me an AER that is not possible at all to achieve. The FCS should knock this on the head.

I bet that more than half the population of the country wouldn't even understand the problem I am describing. So a far more clear, accurate and not-misleading saving rate identifier needs cooking up by the FCS that compels institutions that offer saving products with to state exactly what you would end up with at the end of the savings period. And that should be accurate for both compounding products and non-compounding products.

masonic

[Deleted User] said:

Surely the Metro Bank monthly interest account should be advertised as 5.76% Gross, 5.76% AER since that is exactly what you would have at the end of the year ( if you let the interest sit in a 0% growth account as it was paid out monthly ) ?

No, because that would be inconsistent with the agreed definition of AER, used across financial professions, widely understood by the public, and the cornerstone of rigorous comparisons between different accounts. It is not 5.76% gross, 5.76% AER, because the interest is not locked away until maturity with the consequent opportunity cost. If it were, it would be the equivalent of annual interest, which would mean gross = AER. In the case of this account, you will get precisely the same amount of interest as an easy access account paying 5.91% AER where the holder maintains the same balance.

Usually in situations when a few individuals misunderstand a widely used technical term, the easiest solution is to educate those individuals, which hopefully this thread will eventually achieve.

friolento

Good luck with your efforts to have the law / the regulations (which apply to all banks, not just Metro) changed.
When you do take your case forward, please be sure you distinguish between investments (not offered by Metro to retail customers) and savings (offered by Metro to retail customers), and also use the right abbreviations. I think you probably mean FCA when you say FCS, as there is no body called FCS in regulating the banks.

[Deleted User]

eskbanker said:

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.

You're not really understanding my problem as a new investor. I had no idea of accounts "paying away" interest. Now that I've been through it I understand the problem and, yes, I should only look a Gross rates to compare one "paying away" product to another. But I wasn't in the market for comparing one "paying away" product from another - I was just looking for good savings accounts.

Metro Bank advertise this product as 1 single product and you get to choose to have your interest paid at the end in one go or "paid away" monthly and both products are advertised as the same AER. But if you didn't have the alarm bell go off in your head when they tell you the interest would be paid into another account you would be left far more out of pocket if you opt for the monthly account ( because you are being told right in front of you they have same AER ).

masonic

[Deleted User] said:

eskbanker said:

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.

You're not really understanding my problem as a new investor. I had no idea of accounts "paying away" interest. Now that I've been through it I understand the problem and, yes, I should only look a Gross rates to compare one "paying away" product to another. But I wasn't in the market for comparing one "paying away" product from another - I was just looking for good savings accounts.

Metro Bank advertise this product as 1 single product and you get to choose to have your interest paid at the end in one go or "paid away" monthly and both products are advertised as the same AER. But if you didn't have the alarm bell go off in your head when they tell you the interest would be paid into another account you would be left far more out of pocket if you opt for the monthly account ( because you are being told right in front of you they have same AER ).

The choice is there for people who already want to take an income from their savings account. For those people this option is identical to choosing an access account paying the same AER and withdrawing the interest as soon as it is credited. Think of having interest paid away as a means of making withdrawals from an account that doesn't normally permit withdrawals.

Anyone who does not wish to access the interest during the term should opt for the option where it is paid at maturity, unless they want to take a chance of reinvesting the interest at a higher rate elsewhere. 

Taking into account the above, I don't think a reasonable person would believe money paid out to an external account would continue to earn interest in the savings account from which it came.