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The regulator has provided an update on the actions taken since its cash savings market review.

By Nicola Higgs, Becky Critchley, and Charlotte Collins

On 18 September 2024, the FCA provided an update on its work in the cash savings market. Following the FCA’s 2023 cash savings market review in light of concerns that higher interest rates were not being passed on effectively to savers, the regulator has conducted further work, including an in-depth analysis of the profits made on savings accounts and their contribution to overall firm profitability. The FCA has also worked with the largest firms regarding how they are providing fair value to easy access savings customers.

The FCA has found that interest rates for easy access savings accounts have risen, and that base rate increases were increasingly passed to savers. The FCA believes this suggests that greater competition in the cash savings market is having an effect. However, its profit analysis indicates that firms have still been benefitting significantly from savings products. The regulator has also seen improvements in the volume and timing of firms’ communications to savings customers. It suggests that specific communications to narrow groups of customers are more effective than large volume, generic communications. The FCA encourages firms to keep working to improve customer communications, and to use customer research to understand which approaches work best. The regulator wants firms to ensure customers understand the information presented and can make informed choices about when they need to act. This should include more personalised communications, including prompts to switch products when appropriate.

The FCA states that it will continue to closely monitor future savings rate changes as the Bank of England base rate begins to fall. If the regulator identifies that a firm has changed its savings rates significantly more quickly and fully in response to interest rate reductions, compared to previous interest rate increases, then it will expect a clear explanation.

Fair Value Assessments

The FCA highlights that it has published good and poor practices in relation to how firms are meeting the price and value outcome under the Consumer Duty in tandem with this update (see this related blog post). These findings were partly informed by the FCA’s work in the cash savings market. The FCA’s update on the cash savings market reiterates key areas of these findings, such as emphasising that fair value assessments need to be evidence-based and sufficiently granular, providing clear rationale for the costs charged and robust indications of the financial and non-financial benefits received. The FCA also stresses that fair value assessments should feature critical assessment, and should not simply seek to justify previous pricing decisions. Firms should review the full feedback on fair value assessments and make any necessary improvements to their own processes.

Practices Raising Concerns

The FCA specifically notes certain practices it has observed in the cash savings market which, while not necessarily unacceptable, tend to pose greater risks of not achieving good customer outcomes. These include:

  • Using multiple tranches of the same savings product to pay higher interest rates to new customers. The FCA emphasises that this practice particularly risks poor outcomes for customers on the lower rates if there are not effective customer communications to help them move to higher rates.
  • Using annually renewable bonus rates on savings products, especially if customers must register to receive the bonus and the rate without the bonus is not market. The FCA recommends that firms review the uptake of such bonus rates and consider fair value and the quality of customer communications if uptake is low.
  • Using regressive interest rate tiering to discourage customers from maintaining large balances. The FCA emphasises that accounts with these features need careful monitoring to assess whether the majority of balances receive lower rates and how that lower rate compares with other accounts, and to ensure that customers with larger balances have adequately considered the alternatives.

The FCA urges firms using these practices to be mindful of the potential risks and to consider carefully whether they are meeting the requirements of the Consumer Duty from a holistic perspective. In particular, firms should review whether such products are offering fair value to different demographics and whether communications to customers who are not experiencing good outcomes are effective.

Platform Cash

As part of related Consumer Duty work, the FCA also has looked at how investment platforms and self-invested personal pension (SIPP) operators earn interest on the cash balances they hold for their customers, and in particular the amount of interest these firms retain for themselves. This practice has previously attracted interest from the FCA (see, for example the Dear CEO Letter sent in December 2023). The FCA is clear that firms should consider retained cash in these circumstances as part of their fair value assessments, and gives an example of good practice being an investment firm clearly linking the amount of interest retained to the effective cost to serve the customer.

Investment platforms and SIPP operators should take note of the FCA’s comments and ensure that their approach to meeting the price and value outcome under the Consumer Duty — and particularly to considering the impact of retained interest — is consistent with FCA expectations.

Next Steps

In light of the FCA’s update, key action points for firms active in the cash savings market should include:

  • Preparing a strategy for lowering interest rates on cash savings products (and any other relevant products) as the base rate falls. This should be rigorously tested to ensure it will provide the right outcomes under the Consumer Duty.
  • Checking for practices that might raise concerns, such as those already highlighted by the FCA or other similar practices, and considering whether customers are receiving fair value in relation to products using these practices.
  • Ensuring their fair value assessments take into account all of the FCA’s points in this update and in its separate publication on good and poor practices in relation to price and value. In particular, firms should act promptly and effectively on any evidence of customers not receiving fair value.
  • Continuing to improve customer communications, particularly to ensure customers receive clear information that is personalised to a level that enables them to understand the options available to them and how to act to switch products if necessary.

Although the FCA will continue to monitor the savings market, it states that it does not expect to provide further savings updates in future unless it identifies further market-wide concerns. However, the regulator will doubtless be monitoring individual firms to see how they continue to address previously raised concerns.