Saving rates and the Duty

Last week I wrote about the return to higher interest rates in the cash savings market. I raised the question of whether the market will start to look as it did in 2018, with the FCA having widespread concerns about lower rates for longstanding customers. Or whether we’ll see a different outcome emerging given the FCA’s Consumer Duty.

Incentives for firms in the savings market create pressure for such differentials to open up. We can think about two groups of customers. The first group will be keen to benefit from higher interest rates on their savings. They will check the interest rate they get today. And then they will use best buy tables and price comparison websites to find and move their balances to a better rate. Firms have strong incentives to respond by raising rates for new customers to win these balances.

But a firm does not need to compete so much for a second group of customers. This group may not shop around for higher interest rates. The FCA in its 2015 cash savings market study tried to nudge these customers to shop around more - requiring firms to make it easier to find the information customers need, and easier to switch. Even so, the incentive to raise rates for these customers is weaker. This perhaps explains why the FCA concluded that its disclosure and switching remedies had “limited impact”.

The FCA’s Consumer Duty now asks firms to act to deliver good outcomes. Firms will be starting to work through what it is they need to do in the cash savings market to meet the Consumer Duty, and whether this needs to go beyond what they may have done in the past. We think there are four areas for firms to consider.

1. Get the basics right in terms of customer understanding and the requirements of the FCA’s cash savings remedies. Being clear on the interest rate customers are getting; communicating to existing customers when higher interest rates are available and how to access them; making it easy to switch products.
2. Review the FCA’s consultation on a Single Easy Access Rate (“SEAR”), which it paused in 2020 due to the absence of interest rate differentials at the time. The FCA proposed that firms could offer multiple introductory rates for up to 12 months, recognising the importance of rate differentials to attract customers and manage liquidity. After 12 months, firms would then need to choose one SEAR for their easy access cash savings accounts, and one for their easy access cash ISAs. By having only a single rate (rather than multiple back book rates), this was intended to increase competitive intensity and so “protect longstanding customers”.
3. Firms will need to undertake a value assessment for cash savings customers, which should investigate interest rate outcomes. This should explain why the level of the SEAR (and any other back book rates) are “reasonable relative to the benefits” for customers. The assessment should also consider the relationship between interest rate and customer tenure (if there is no SEAR), and interest rates for different customer groups. There should be a narrative that explains the reasonableness of any differentials. These reasons might include cost, lifetime value (acquisition costs, channel usage) and competitive dynamics.?
4. Finally, firms may want to consider whether the way the market works and competitors behave constrains their ability to deliver good outcomes for customers. Are some competitors gaining an advantage from a different interpretation of the Duty? – perhaps a greater willingness to persist with lower rates for longstanding customers, or to offer multiple back book products. These issues, and the incentives behind them, may be something the FCA eventually considers through market-wide review (or by revisiting its work on the SEAR).