Key takeaways from the FCA’s cash savings market update – the focus is on banks & building societies but relevant to all

On 18 September 2024 the FCA published an update on progress in the cash savings market. This follows on from its July 2023 review and 14-point action plan. The review, action plan and update are all focused on banks and building societies but there is read across to interest retention on cash balances by platforms and SIPP operators which was the subject of the FCA’s Dear CEO letter last December.

Increase in interest rates

Since July 2023 the FCA has seen improvements in both the rates available to savers and the volume and timing of firms’ communications to savings customers. Average easy access rates increased from 1.66% to 2.11% and there are now 174 instant access/no notice savings accounts offering interest rates greater than 4%. The FCA estimates that consumers will receive an additional ￡4bn per year in interest payments.

Profitability findings

Based on FCA analysis carried out between October 2021 – September 2023:

• some firms experienced some benefits to their profitability as base rates rose, these benefits seemed to be increasingly passed through to the consumer.
• improved overall financial performance (net interest margins - NIMs) between December 2021, when the base rate started increasing, to mid-2023, with a rising contribution from savings.
• firms’ savings products saw faster increases in income than interest expenses for all types of account.
• easy access accounts saw the highest NIMs compared with term accounts.
• there were signs that savings NIMs peaked and early signs of decline as the mix of products shifted from easy access and limited access accounts to term accounts.

Review of fair value assessments

A key part of the update is findings from the FCA’s review of the fair value assessments (FVAs) of the 9 largest easy access savings providers. These findings will be of interest to all FCA regulated retail firms in all sectors. The Consumer Duty is all encompassing and many of the FCA’s findings in one sector will apply equally to other sectors. In fact, on the same day as publication of this update, the FCA also published good and bad practice examples of fair value assessments with some examples taken from its work in the cash savings market.

FCA’s key FVAs findings:

• Assessment of value: many FVAs were not sufficiently "testing" and tended to seek to validate previous pricing decisions. Many FVAs lacked appropriate data and analysis to support the conclusions. FVAs which considered several accounts in one assessment were not sufficiently granular and did not clearly set out the assessment for each account product.
• Benchmarking: firms had selective benchmarking. When a product was an outlier, firms didn't set out a clear rationale as to why it was nevertheless considered fair value.
• Differential outcomes: better FVAs identified core customer groups within accounts’ target markets and set out actions where needed. Firms need to think about what information they need in order to understand the issues their customers face and the outcomes they receive, rather than relying only on existing data.
• Vulnerable customers: The FCA didn't see evidence that many firms had fully assessed the outcomes for customers with characteristics of vulnerability.
• Contextual factors (including cost to serve): The FCA said that there is no requirement that firms must include costs in assessments of value (strictly, it is guidance in PRIN 2A but an evidential provision in the insurance sector under PROD 4), but the FCA notes that understanding the margins that a product earns can be useful context for firms’ governance to assess fair value. The FCA is also leaving it up to firms the degree of cost analysis they include in their FVAs, but if they do include it, the analysis must be sufficiently clear to enable an assessment of fair value to be undertaken. The FCA also notes that if firms use costs as a justification for lower interest rates than peers, they must include a clear rationale. In other words, you do not have to use costs, but it’s a good thing if you do it well, especially if you are a larger firm.
• Other issues covered: firms need to take action as a result of their FVAs where needed; they need to have evidence to back-up their FVAs; and they need good data to track outcomes.

Concerns over some practices

FCA highlighted some practices that might be an issue and said firms should review them to ensure they offer fair value. In other words, if you engage in any of these practices, you’ll need good FVAs and evidence to justify them:

• multiple tranches of savings products with higher rates for new customers.
• using annual renewable bonus rates on savings products.
• using regressive interest rate tiering to discourage customers from maintaining large balances in easy savings accounts.

And a word of warning: the FCA notes that the base rate is likely to fall and that whilst they recognise firms must balance their lending and savings pricing in line with their business model, they will expect a clear explanation where a firm has changed its savings rates significantly more quickly and fully in response to interest rate reductions, compared to previous interest rate increases.

Consumer communications

The FCA found that customer communications often had overly passive messaging with calls to action that were too vague; contained too much generic information and not enough upfront signposting on where consumers could get more details on switching accounts; and use of unexplained jargon.

Next steps

The FCA will continue to monitor the savings market but they do not anticipate further updates unless they identify market-wide concerns not covered in the update. That’s regulatory speak for ‘we are moving on to other issues, unless something comes up that we haven’t seen before which worries us.’ However, the FCA expects retail banks and building societies to consider its findings and make improvements in line with good practice, and notes that the findings may be useful for other firms developing their approach to fair value under the Consumer Duty.

Clive Gordon , Consumer Investments and Financial Crime Practice Lead, Sicsic Advisory