FCA Update on Cash Savings - September 2024: In-Depth Insights

The Financial Conduct Authority (FCA) has provided a detailed update on the cash savings market following its initial review published in July 2023. This latest report, released in September 2024, assesses how banks and building societies are improving customer outcomes, particularly concerning interest rate pass-through, fair value assessments, and communications under the new Consumer Duty framework. Here are the key takeaways from the report:

Fair Value Assessments (FVAs): Challenges and Expectations

The FCA reviewed the fair value assessments (FVAs) conducted by the largest nine providers of easy access savings accounts, including major institutions like Lloyds Banking Group, HSBC, NatWest, and others. The review aimed to ensure that these firms are offering fair value to customers under the Consumer Duty, which requires a reasonable relationship between the price paid by consumers and the benefits received.

However, the FCA found that many firms struggled to adequately assess fair value, with most lacking robust data and analytical processes to justify their pricing decisions. In particular, several FVAs failed to challenge historical pricing structures, relying on outdated or incomplete information. Some firms grouped multiple products under a single FVA, failing to assess each product’s unique value properly. For example, products with different levels of customer access or pricing should have been evaluated separately, yet were often bundled together in the assessments.

The FCA expects firms to improve their FVAs by integrating more data-driven insights and clearly demonstrating the rationale behind their pricing strategies. Firms that do not address these issues may face regulatory action.

Risky Practices in Cash Savings Products

The FCA identified specific cash savings practices that carry a higher risk of failing to meet Consumer Duty standards. One of these practices is the use of multiple tranches for the same savings product, distinguished only by different issue numbers. While this approach allows firms to offer higher rates to new customers, it leaves existing customers with lower rates unless they proactively switch. The FCA warned that this approach could result in poor outcomes for loyal customers, particularly if firms do not communicate the availability of better deals effectively.

Another practice under scrutiny is the use of annually renewable bonus rates. While bonuses can encourage customers to switch products, firms often fail to inform customers adequately when the bonus expires. As a result, customers may continue holding low-interest accounts without realising they can earn more by switching. The FCA emphasised that firms need to improve their communication strategies to ensure customers understand their options and take advantage of higher rates.

Additionally, the use of regressive interest rate tiering, where customers with larger balances receive lower interest rates, was flagged as a potential risk. While this structure can incentivise customers to move excess savings to other products, it may also result in poor outcomes if customers are unaware of better options or if the lower rates are not justified by the value provided.

Data and Market Trends: Competition and Interest Rate Movements

The FCA noted positive changes in the market, with increased competition driving up interest rates for savers. Average easy access rates rose to 2.11% by June 2024, up from 1.66% in July 2023, while fixed-term and notice account rates reached an average of 3.96%. This upward trend reflects growing competition, as savers move funds from non-interest-bearing accounts to higher-paying options. Between July 2023 and June 2024, balances in fixed-term and notice accounts increased by £29 billion, while deposits in non-interest-bearing accounts dropped by £14 billion.

Despite these improvements, the FCA remains cautious as the base interest rate fell in August 2024, with further cuts expected. The regulator warned that firms must be careful not to pass on rate reductions more quickly than they had passed on increases in the past. This discrepancy could raise concerns about fairness and transparency, especially if firms adjust savings rates downward faster than necessary.

Customer Communication: The Need for Better Engagement

A central theme of the FCA’s update was the quality of customer communication. Since the July 2023 review, firms have significantly ramped up their engagement efforts, sending out over 100 million communications to savings customers in 2023 alone. These communications included letters, emails, and social media posts encouraging customers to switch to better rates. However, the effectiveness of these communications varied widely.

The FCA found that generic, high-volume messages were often less successful than targeted, personalised communications. For example, some firms sent repeated, large-scale messages without clearly explaining the benefits of switching accounts or detailing the specific interest rate a customer was receiving. In contrast, firms that personalised their messages and focused on small, targeted groups of customers were more successful in prompting account switches.

The FCA urged firms to adopt a more customer-centric approach, ensuring that communications are clear, timely, and action-oriented. Overloading customers with generic information can be counterproductive. Instead, messages should focus on helping customers understand the rate they are receiving and what they could gain by switching accounts. This is particularly important as interest rates start to decline, and customers may need to be more proactive in securing better deals.

Financial Resilience and Savings Educational

The FCA also emphasised the importance of promoting financial resilience among consumers. It praised the Money and Pensions Service (MaPS) for its work on the Savings Charter, which encourages individuals and communities to prioritise savings. The FCA encouraged firms to direct customers to resources like the MoneyHelper savings calculator and budget planner, which can help them build stronger financial foundations.

This initiative forms part of a broader effort to strengthen the UK’s financial well-being and ensure that consumers are not only aware of better savings rates but also equipped with the tools to save more effectively.

Profitability Analysis: Passing Benefits to Consumers

As part of its commitment to transparency, the FCA conducted a profitability analysis of savings products across the market. The review revealed that while firms have benefited from rising base rates, many are now passing these benefits on to consumers in the form of higher interest rates. Net interest margins (NIMs) for easy access accounts were notably higher than for term accounts, although there were signs that NIMs had peaked as more consumers shifted to fixed-term products.

The FCA welcomed this trend but reiterated that firms must continue ensuring that consumers receive fair value, especially as the base rate begins to fall. If firms fail to pass on reductions in savings product profitability, they risk regulatory intervention.

The September 2024 update from the FCA reflects significant progress in the cash savings market but also highlights areas where firms must improve. While interest rates have risen, and competition has intensified, there are still concerns about how well firms are communicating with customers and ensuring they receive fair value. The FCA’s focus on transparency, data-driven decision-making, and consumer protection under the Consumer Duty will continue to shape the market as firms adapt to these evolving standards.

The message is clear, while improvements have been made, there is still work to do to ensure that all consumers benefit from a well-functioning cash savings market.