Although the FCA’s new Consumer Duty is not yet in force, the regulatory environment is already shifting. For example, the FCA has stated that it intends to use the Duty to ensure that retail banks pass on higher interest rates to consumers.
Both the FCA and MPs have been focused on this area for a number of months. In early March, the Treasury Committee sent letters to Barclays, HSBC, Lloyds and NatWest in which they highlighted that retail banks are failing to pass on higher interest rates to savers. Despite the Bank of England’s base rate rising from 0.25% in January 2022 to the current rate of 4.5%, everyday savings accounts are often still paying rates as low as 0.5-1%. The Treasury Committee highlighted in these letters that retail banks’ net interest margin (the difference between the rate banks receive from borrowers and pay to savers) has increased by 13-24% over the last year.
A recent Treasury Select Committee meeting highlights that the FCA is also scrutinising this issue. Nikhil Rathi (the FCA’s CEO) explained that the regulator is looking at whether banks’ governance practices are encouraging decisions on mortgages to be made faster than on savings as well as whether banks are relying on customer inertia as a reason not to raise savings rates.
The FCA’s regulatory environment will become tougher for firms from July when the Consumer Duty comes into force for existing products and services, and this will give the regulator further tools to tackle these issues relating to equity.
Under these new rules, firms may be expected to actively guide customers to products offering better rates under the duty to deliver good outcomes for customers. Moreover, fair value is one of the four outcomes of the Consumer Duty that firms need to achieve, ensuring consumers receive fair prices and quality. The FCA wants firms to assess whether the total price paid by the consumer is reasonable in relation to the benefits that they achieve. There is no detailed guidance on this, but the FCA has stated firms can consider different factors, including costs, benefits, utility and market rates for analogous products.
When MPs asked Mr Rathi at the recent Treasury Select Committee meeting about retail banks’ increased net interest profit margins, he explained that “the fair value rules…and the new consumer duty will mean that banks have nowhere to hide on this.”
Banks have already been undertaking significant work to comply with the consumer duty, and will need to prioritise pricing considerations when implementing it. They will also be paying close attention to these latest statements that clearly indicate that the FCA is watching and is willing to bring enforcement action in this area.