364Guidelines relating to AER calculations
365In order to ensure consistency of calculation and fair comparison of products, the AER
366should be derived on the following basis:
368A1 The only changes to the amount deposited to be taken into account are those
369 that are required by the terms of the account. So, for example, on an account
370 from which withdrawals may be made, the AER calculation is based on an initial
371 deposit with no subsequent movements. On the other hand, on a monthly savings
372 account, each monthly deposit is taken into the calculation. If certain deposits are
373 required to qualify for a conditional bonus, then the AER including conditional
374 bonuses must be calculated assuming that the necessary deposits have been made.
375 See Section 3 above on ‘AER Prominence’.
377A2 The only changes to rates that are taken into account are those that are stated
378 at the outset. No allowance is made for change that may occur because market
379 rates generally move up or down. So, for example, if an account has a rate which will
380 increase the longer a deposit is held, the higher rate will be used after the requisite
381 time. Where an initial higher rate is guaranteed for a number of months (an
382 “unconditional bonus”), the rate after that period will reduce to the “normal” rate
383 applicable at the time of the advertisement. If a monthly savings account has a tiered
384 interest rate, then the appropriate rate will be used as the balance builds up. Where a
385 deposit will automatically default into another product on maturity within the next 12
386 months and the customer is unable to exit the default product itself (or only exit by
387 incurring a fee/charge) until maturity then the expected rate for the default product at
388 the time of the advertisement should be reflected in the ‘blended’ AER calculation.
390A3 If an account has a fixed or minimum term, the calculation is to be made for
391 that period. If the term is indefinite, the calculation is to be done on the first year, or
392 until the first interest payment if that is after one year. If a conditional bonus requires
393 that you leave the deposit in the account for a certain time, then the AER including
394 conditional bonuses will be calculated over that period. See Section 3 above on ‘AER
395 Prominence’. Where accounts default into another product on maturity with no option
396 to exit prior to maturity of the default product (or only exit by incurring a fee/charge)
397 the calculation should use the maturity date of the default product as the fixed term
400A4 All interest paid is treated as if it is invested and earns a rate of interest equal
401 to that being earned on the deposit. This may, in fact, happen if the interest is
402 added to principal. However, even on an account making monthly interest payments,
403 this assumption is made to illustrate the value of receiving these payments during the
404 year. If a deposit has a very short term (for example, a six-month bond), for AER
405 purposes it is assumed, again for illustrative and comparative purposes, that the
406 principal and interest can be invested at the end of the period at the same rate for the
407 rest of the year. Consequently, providers should not ‘underquote’ the AER for
408 deposits of less than one year to maturity by assuming a reinvestment rate other than