On 31 July 2023, the FCA published its Cash Savings Market Review 2023.
In order to combat high inflation in the UK (currently at 7.9%) the Bank of England has raised interest rates from 0.1% in December 2021 to 5.25% as of 3 August 2023. There has been significant concern, however, from the public, politicians and the FCA that retail banks have passed high interest rates onto borrowers (such as through mortgages) but not to depositors (see our previous blog post on this here).
The FCA is seeking to remedy this with its Review, which includes a 14-point action plan to ensure that banks are passing on these interest rate rises to savers. The FCA’s ability to do so is enhanced by its new powers under the Consumer Duty, which also came into force on 31 July 2023 and which is intended to secure better outcomes for consumers (including by ensuring that they receive “fair value”).
The FCA wants there to be a ‘competitive cash savings market’ (FCA article on the 14-point action plan linked here). It has stated that, although interest rates on saving accounts have been rising, this has happened at a slower pace for easy access accounts (by contrast with notice and fixed term deposit accounts). Indeed, between January 2022 and May 2023 nine of the biggest savings providers on average only passed on 28% of the base rate rises to their easy access depositors. There is also a high level of variance between firms, with smaller firms offering higher interest rates on average than larger firms. The Review highlights how these larger firms benefit from a large and stable customer base (who are willing to choose saving accounts from their current providers). These large firms experience a competitive advantage in the savings market by being able to offer lower savings rates.
The FCA has promised to review the timings of retail banks’ saving rate changes each time there is a change to the base rate, and will publish an analysis every six months of those banks’ easy access saving rates (ranking them from best to worst). It will also require firms offering the lowest saving rates to provide it with their fair value assessments under the Consumer Duty by 31 August 2023. As part of these assessments, these firms must justify how their rates offer fair value to consumers. The FCA has indicated that firms could demonstrate this by considering whether the interest rates consumers receive reflect trade-offs the customer is making (e.g., having their money in an instant access account as opposed to a fixed-term or notice account), as well as whether the interest rate diverges significantly from other similar products on the market. The FCA has said that it will take “robust action” by the end of 2023 against those who cannot demonstrate fair value.
Another focus of the action plan is requiring retail banks to improve their communications to consumers. For example, the FCA has stated that firms should proactively explain to customers when there might be a suitable account at a preferable savings rate.
This is all part of the FCA’s goal to create a ‘fairer and more consumer-focused playing field on which firms can compete and innovate’ (page 43 of the Review) and demonstrates that, although the FCA is not a price regulator, it is ready to exercise its new powers under the Consumer Duty to ensure that consumers get fair outcomes on price. It will be interesting to see how rigorous the FCA will be in enforcing their new action plan, and firms should be ready to justify and demonstrate how their savings rates offer fair value to consumers.