What are the key findings from the FCA’s Cash Savings Market Review 2023?

As committed to by the FCA in June 2023 and highlighted in our previous Engage article on its current cash savings work, it has now published its Cash Savings Market Review 2023 report.

The report analyses the current state of competition in the cash savings market and sets out the consumer outcomes that the FCA expects and the actions needed to achieve them.

The FCA’s overarching message is that, while some progress has been made in recent weeks to ensure fair treatment of savers given the UK base rate rise from 0.1% in December 2021 to 5.0% in July 2023, much more is required to ensure they consistently get a better deal in line with the newly applicable Consumer Duty (and its Strategy 2022-25).

While there may be some good explanations for the lag in increases to savings rates when compared to base rate increases over the last 18 months, the FCA considers that failures in competition continues to be the underlying issue in the functioning of the cash savings market.

In addition, today’s increasing financial pressures highlight the need for firms to better support customers who currently lack savings to build greater financial resilience for the future by starting to save regularly, if they are able to do so.

Key findings are:

• The pace and scale at which firms pass through higher interest rates to savers needs to improve;
• Competition is delivering better rates for savers who shop around but many longstanding easy access customers are penalised;
• Switching is increasing but firms can improve the process for consumers; and
• Firms must do much more to prompt consumers to make use of better savings products.

The FCA flags that, while it did not have time in this review to conduct an analysis of the impact of regulatory requirements on the degree of pass through, it recommends that such an analysis be undertaken as part of the review of ring-fencing regulations that HM Treasury is currently conducting.

Also, having seen some increase in firms’ profitability through an improving net interest margin (NIM) and while it points out that this is to be expected given that the NIM was unusually low when interest rates were historically low, the FCA will continue to monitor this closely.

Consumer Duty requirements are essential to ensuring customers’ financial objectives are front and centre

The FCA makes the point that market share of the Big 9 banks and building society and the demand-side market features, including customer inertia and a preference to keep money in easy access accounts, mean that its Consumer Duty requirements on consumer understanding, consumer support and fair value are ‘essential to ensure firms put customer’s financial objectives at the heart of what they do’.

Section 4 of the report sets out how the Consumer Duty outcomes may apply in the cash savings market. This includes in relation to the consumer support outcome, where it makes the point that in the present economic conditions and cost-of-living pressures, firms should be alert to the fact that more customers (many of whom will be in vulnerable circumstances) may be seeking more support, including reassurance, practical information, and advice about their financial position and savings products.

The FCA states that, where it identifies practices causing poor customer outcomes, firms can expect it to take ‘robust action, such as interventions or investigations, along with possible disciplinary sanctions’.

Actions for firms and the FCA

The FCA’s next steps (Section 5 of the report) look to prioritise actions for firms in implementing the Consumer Duty in the cash savings market, as well as measures designed to support improved competition and innovation. Those next steps are set out below. For a shorter overview of the actions that the FCA will take and that firms must take, see the summary 14-point action plan on page 7 of the report and the FCA’s related press release.

Tailoring Consumer Duty outcomes for the cash savings market

• The FCA’s preliminary analysis indicates that there is significantly further to go to ensure that consumers are getting the Consumer Duty outcomes in all areas of this market. It has therefore identified a non-exhaustive list of priority areas of focus for improved outcomes in cash savings:
  • Fair value: a reduction in the proportion of easy access accounts with very low interest; firms to review savings rates quickly following base rate changes; the difference in rates between existing and new products to continue to narrow.
  • Products and services: the proportion of balances held in non-interest bearing accounts to fall; firms to switch cash ISAs to cash ISAs within 7 working days.
  • Customer support and communications: firms to make clear to customers that they are in the lowest paying accounts; firms to help more consumers to save regularly to increase their financial resilience.

Package of actions

• The FCA is proposing some actions for firms directly related to the Consumer Duty and some aimed at improving competition in the market.
• The UK’s largest banks and building society have committed to a number of steps to support faster progress towards delivering the required outcomes. This follows the FCA’s roundtable discussions with the firms on 6 July 2023. Some of the steps are voluntary commitments, and others reflect early strategies for how firms will satisfy the Consumer Duty’s higher expectations. They include:
  • A targeted, firm-by-firm customer engagement campaign to support consumer financial resilience by encouraging cohorts of their customers to start saving and/or review other options including available rates which might deliver a better outcome.
  • Commitment to explore how best to leverage the investment made in Open Banking to support savings customers to better understand the information around their savings and to take action, including carrying out a review to report back in 2024 on the scope and opportunities for Open Banking capabilities to help customers make their money work harder and in due course seconding expert industry resource to the FCA to further support this development.
  • Improving on and meeting the existing industry voluntary commitment around cash ISA to cash ISA switching by targeting 90% completion in 7 working days on an annual and aggregated basis (the current voluntary commitment is 85%).
  • Developing a savings dashboard with the FCA which measures consumer activity in the savings market. This is likely to include relevant metrics and benchmarks to measure progress towards a more competitive savings market in response to more dynamic firm engagement, prompts and use of Open Banking data.
• The FCA acknowledges the commercial and competitive sensitivity of firms’ individual product pricing strategies and value assessments. It makes it clear that follow up action on the above activities will be through its supervisory work on a firm-by-firm basis.
• On the wider picture regarding consumer resilience and wellbeing, the FCA points out that some of its actions in relation to savings will support longer-term development of consumer financial resilience and complement other work it is undertaking which is designed to support consumer resilience and outcomes in all markets, from retail lending and insurance to advice, savings and pensions. It also recognises that its work will complement the responsibilities and actions of a number of other stakeholders, including the Government’s work to tackle financial inclusion and the Money and Penisons Service’s (MaPS) UK Strategy for Financial Wellbeing.

Consumer Duty implementation and supervision

• The FCA urges firms to reflect on its findings around cash savings and put the Consumer Duty into action. It makes no bones about the fact that it will be prioritising ‘robustly monitoring and supervising the implementation and delivery of the different Consumer Duty outcomes’ through its supervisory tools, including data monitoring, engagement with individual firms and multi-firm work focused on the Consumer Duty and cash savings with work to begin in Q4 2023. The precise scope of this work is still to be finalised, but it will include review of firms’ implementation of the Consumer Duty and its effectiveness in improving savings outcomes for customers. Some of the other likely actions and areas of focus will be:
  • Fair value
    • While fair value assessments of on-sale savings products should already have been completed by firms, they are strongly encouraged to accelerate their reviews of, and fair value assessments for, off-sale accounts rather than waiting for the July 2024 Consumer Duty implementation deadline for off-sale accounts.
    • The FCA will:
      • require outlier firms (ie firms currently paying the lowest rates) to provide their fair value assessments by 31 August 2023 and will follow up with robust action where those firms cannot satisfy it that their rates provide fair value (by the end of 2023);
      • review the timing of firms’ savings rate changes each time there is a base rate change. This will be on an ongoing basis. It expects to see a reduction in the proportion of easy access accounts paying the lowest rates of interest, in particular accounts currently paying 1% or less;
      • analyse the differentials it has seen between on-sale and off-sale interest rates and challenge firms where it sees large differences that are not adequately supported by fair value assessments, again on an ongoing basis. If the differential is not closing, then it will consider next steps;
      • conduct further analysis into the contribution of cash savings to firms’ profitability.
  • Products and services, customer support, communications
    • The FCA expects firms to proactively engage with and prompt their customers in low and lower paying savings accounts or non-interest bearing accounts in the second half of 2023. Larger firms must send the FCA their methodologies for identifying these customer cohorts and communication approach by 30 September 2023.  It reminds firms that it has clarified their ability to contact all customers to inform them of alternative interest rates in its July 2023 joint letter with the ICO. Larger firms should also build regular prompts into their banking, online and mobile platforms that encourage customers to consider alternative savings products, or prompt staff to alert customers that better rates are available from the firm.
    • Larger firms should closely monitor the effectiveness of customer communications and must submit data on the number of communications sent to the above customers by the end of 2023 as well as their analysis of the impact of these communications, including customers’ understanding of product terms and rates. Firms should explain how they are adapting their communications to reflect this experience. The FCA will review the submitted data in the first half of 2024 (the action plan summary on page 7 of the report states that this will be done by the end of March 2024).
    • As well as the targeted, firm-by-firm customer engagement campaign (see above ‘Package of actions’), the FCA will be asking firms to consider how they might support their customers to access the suite of tools and resources available to them through MoneyHelper provided by MaPS. It suggest that firms may also engage MaPS directly about the Nation of Savers deliverables of its UK Strategy for Financial Wellbeing that MaPS is coordinating with multiple UK stakeholders until 2030.
    • The FCA will work with stakeholders, including MaPS, on an on-going basis to better understand the effectiveness of firm communication to customers to encourage more to save, and consider what wider initiatives would be effective in helping consumers develop financial resilience and encourage more customers to save regularly.

Improving competition

• The two key actions for firms in relation to enhancing competition in cash savings are the move to improve on and meet the existing industry voluntary commitment around cash ISA to cash ISA switching and the agreement to work with the FCA to develop a savings dashboard. See ‘Package of actions’ above for more on each of these actions.
• For the FCA, key actions are:
  • Starting in H2 2023, it will publish an analysis of firms’ on-sale and off-sale easy access savings rates every six months, listing distribution from best to worst, to clearly set out the relative competitiveness of savings providers. It will monitor the approach and effectiveness of this analysis and reporting after H2 2024.
  • It will continue to review firms’ performance on cash ISA switching, taking into account the new voluntary commitment, above.
  • It will be involved in the voluntary industry commitment to explore how best to leverage the investment made in Open Banking, which will include seconding expert industry resource to the FCA to further support development of Open Banking in this area (see above ‘Package of actions’).
  • It plans to develop and monitor relevant firm and market statistics, linked to the outcomes it wants to see, on cash savings and publish regular updates on progress. It states that further work needs to be done to establish data sources and baseline appropriate metrics, which it will publish by the end of 2023.

What about a single easy access savings rate (SEAR)?

The FCA is not proposing to restart a consultation on SEAR (following its abandoned January 2020 consultation) because it has already seen some firms changing their off-sale rates to align more closely with their on-sale rates (which the SEAR was intended to address), competition is driving up these rates over time, and the Consumer Duty requires firms to consider fair value for all savers. The FCA makes the point that, if necessary, the Consumer Duty gives it greater flexibility to take targeted action, including in relation to specific firms, rather than introducing additional rules. It expects firms to thoroughly assess their off-sale products in advance of the Consumer Duty’s July 2024 deadline.

The FCA also rules out a savings charter along the lines of the one that has recently been put in place for mortgages.  It states that there is less need for consumer protection in the savings market, which it considers will work more effectively if competition increases savings rates over time.

The broader retail savings landscape

The FCA recognises that cash savings are only one part of the retail savings market. It flags its ongoing wider work on how financial advice works, interest rates on cash held on investment platforms, improving retail access to bond markets and other long term investments (such as long-term asset funds) and ensuring value for money in pensions saving.

Next steps

• By 30 September 2023, larger firms must send the FCA their methodologies for identifying customers with low and lower paying savings accounts or non-interest bearing accounts and their communication approach to proactively engaging with and prompting those customers. See ‘Actions for firms and the FCA’ above for more on timings for other next steps.
• The FCA plans to further review and quantify its desired outcomes for the cash savings market in the second half of 2023 and states that it ‘won’t hesitate to propose further action if insufficient progress is made’.
• The FCA’s Consumer Duty now applies to new and existing products or services open to sale or renewal. It will apply to products or services held in closed books from 31 July 2024. ​Our Consumer Duty hub provides a number of useful resources to help firms.

If you would like to discuss any aspect of the Consumer Duty or the FCA’s saving rates work, please get in touch with one of the listed lawyers or your usual Hogan Lovells contact.

Authored by Virginia Montgomery.