The FCA’s action plan on cash savings: the Consumer Duty bares its teeth

Audience:

Board members, consumer duty champions and other executives of retail banks. Consumer Duty programme champions and sponsors of other firms within the scope of the Duty.

At a glance:

• The FCA’s Cash savings market review and action plan (the Review) provide the first insight into its approach to supervising the Consumer Duty (the Duty). The approach will be assertive and data-led. The FCA will aim to identify practices that may not be delivering good outcomes for customers quickly and pursue them through data requests, interventions and, where necessary, disciplinary actions.
• Understanding how the FCA has approached the cash savings market is therefore relevant to all firms within the scope of the Duty and needs to be factored in as firms tailor their Year 2 Duty implementation plans.
• Demonstrating products provide fair value to customers is a key element of the Duty framework. The Review provides banks and building societies (banks) with a list of factors (including contextual ones) and benchmarks for them to consider in their assessments of cash savings products. Assessments should include evidence that any extra features that affect pricing are actually being used and are valued by customers.
• The FCA strongly encourages banks to accelerate the review and fair value assessments of off-sale accounts (closed products) rather than wait until the July 2024 deadline and expects the gap between rates for on-sale and off-sale products to be justified and narrow over time. The FCA’s ban on price walking in insurance since January 2022 can provide insight into the direction of travel in this area. Firms might want to identify areas where closed products might raise issues of poor value and prioritise the assessments.
• Banks are expected to take action to ensure they have an effective customer communications approach, in particular in relation to customers in the lowest paying accounts. The FCA will review the effectiveness of banks’ engagement with customers by March 2024 and take action where banks have not delivered the outcomes the FCA set out.
• All firms subject to the Duty will learn from the FCA’s expectations and standards as to what it considers effective communications and the factors firms can use to demonstrate it.

First look into the FCA’s approach to Duty supervision

The FCA’s Review and 14-point action plan is wide-ranging, including actions for itself as well as clear actions and expectations for the banks affected. The Review demonstrates that the FCA is more than willing to take action where it sees that banks are not acting in accordance with its expectations, and may provide a useful indicator as to how it will supervise firms under the Duty over the coming months. The FCA states its approach will be assertive and data-led and will aim to identify practices that may not be delivering good outcomes for customers quickly. Banks should expect data requests, interventions or investigations and possible disciplinary actions. Understanding the nature of the FCA’s approach is relevant to all firms within the Duty’s scope and should help inform their plans for implementation of the Duty in Year 2.

The FCA’s action in the cash savings market is partly driven by wider, macro-economic factors, including a cumulative base rate rise from 0.1% in December 2021 to 5.0% in July 2023 and a cost of living crisis that continues to affect consumers. The Duty coming into effect raises the bar for compliance in this area significantly. In its review, the FCA concludes that while it has seen some progress, “this needs to speed up” and significant action is needed to make sure that the savings market delivers good outcomes for consumers in line with the Duty. The FCA has spelled out the outcomes it expects for savers in terms of fair value, products, support and communications and plans to review and quantify outcomes later in 2023, proposing further action where necessary. 

Thinking beyond the cash savings market, firms might wish to consider how this approach could be translated to other products and sectors – for example the mortgage market in the event of decreasing interest rates. 

Key actions and their implications

The review includes eight action points for the FCA and six for firms, many of which are directive and prescriptive. The timeline below provides a visual guide to the most significant actions expected from the FCA and banks between now and 31 July 2024. The actions aim to ensure that banks are passing on interest rate rises to savers appropriately, are communicating with customers effectively and are offering consumers fair savings rate deals.

• Fair value assessments – on-sale products

First, all banks are expected to use their fair value assessments for on-sale savings products to ensure these are providing fair value to customers. Those paying the lowest rates will be under significant scrutiny and should expect regulatory action before the end of the year if they fail to demonstrate their rates are fair.

In its Review the FCA outlines core factors that should be included in a good fair value assessment for a savings product. Banks should consider the features of the different types of savings products they offer alongside the interest rates for each. This should be assessed against key benchmarks such as whether the bank offers higher interest rates for similar products, and whether the rates on offer are commensurate with other benefits of the products. When it comes to other benefits, such as branch access, better app functionality or telephone services, banks are expected to evidence that consumers actually use and value the services and therefore it is fair that they trade-off higher interest rates to secure them.

This last point will be of interest to all firms under the Duty as it may affect their product governance including design and approval processes. For example, when offering products with specific features or benefits, firms will need to consider how they will be able to evidence that customers use and derive value from these benefits over time. Firms will have to consider what data and metrics they could use to evidence value of these benefits or they might be confronted with regulatory challenge about the value of their more sophisticated product offerings.

• Savings rates driven by funding needs

The FCA notes, albeit briefly, there are several macroeconomic and other complex factors affecting banks’ decisions on the appropriate savings rate. In some instances, such as where a bank has no current need for additional funding, banks will deliberately price their deposit products at the low end of market benchmarks. This is an appropriate tactical consideration for a bank that has sufficient funding for its currently foreseen need and might explain the presence of product outliers. 

It is not clear how banks’ deliberations on these factors will affect the FCA’s view of whether banks are delivering good outcomes but it is an area where banks might want to seek clarification from the FCA.

• On-sale/off-sale differential outcomes

The FCA strongly encourages banks to accelerate the review and fair value assessments of off-sale accounts (closed products), rather than wait until the July 2024 deadline, and expects the gap between rates for on-sale and off-sale products to be justified and narrow over time. In January 2022, the FCA implemented new rules banning price walking in home and motor insurance (price discrimination between new business and renewals) and this provides a clear example of the FCA’s stance on firms exploiting customer inertia. In the case of the cash savings market the FCA expects banks offering differential rates to on-sale and off-sale customers to be able to justify the differences through cost or benefit differentials.

The FCA makes it clear that firms will not be delivering good outcomes where they take advantage of vulnerability or behavioural biases in pricing for different products. The FCA found that banks’ techniques for addressing customer inertia tend to rely on a passive approach to customer engagement and banks did not have a plan to make it more proactive and effective. The experience from the insurance market indicates that justifying differential pricing and monitoring outcomes across different groups of customers can be a significant challenge that requires careful rule interpretation, judgement and developing the necessary MI and controls to monitor outcomes. The FCA plans to analyse differentials between on-sale and off-sale interest rates and challenge banks where differences are not adequately supported by value assessments. Beyond the cash savings sector, firms might want to consider if any of their closed products are providing poor value to customers and prioritise remedial work ahead of the July 2024 deadline.

• Rate setting timing and lags

The FCA will review the timing of banks’ saving rate changes each time there is a base rate change and analyse the contribution of cash savings to their profitability. Our view is that significant lags on increasing rates on savings accounts products would be difficult to justify in comparison with a more agile approach to increasing interest rates on mortgages. Banks will need to monitor their lending margins and processes for changing interest rates on both sides of their balance sheets.

• Effective communications approach

The FCA is demanding banks take action to engage with their customers in low paying or non-interest-bearing accounts in the second half of 2023. Larger banks will need to send their methodologies for identifying these customers and their communications approach to the FCA by 30 September 2023. Larger banks are also expected to monitor the effectiveness of their customer communications and provide the FCA with data on the number of communications sent and their internal evaluation of the impact on customers. The FCA will carry out a review of the effectiveness of communications in the first half of 2024.

Consumer understanding and the review of communications has been one of the most challenging aspects of the Duty implementation for firms in the past few months. The FCA’s approach to the cash savings market could be indicative of how it plans to challenge firms on their compliance with the consumer understanding outcome for other products and sectors. Firms should consider if an evaluation of the effectiveness of their customer communications is required in other areas to assist in prioritising areas of review and change during Year 2 of the Duty implementation.

Conclusion

All firms subject to the Duty should consider how the FCA’s approach to supervision of the Duty in the cash savings market may affect their plans and priorities. With its actions in the cash savings market, the FCA has signalled loud and clear that it is more than willing to accelerate progress and request action over a short time period where it believes consumers may be receiving poor outcomes. This may well influence the plans firms have for Year 2 of Duty implementation and the need to embed the Duty into their business as usual operations. Taking a proactive approach now is likely to be a good investment for firms to ensure a smooth journey into full Duty compliance by July 2024.