With another base rate hike this week, taking the Bank of England interest rate up to 5.25%, which is its highest level since early 2008, it’s good that the bad behaviour of some savings providers to their customers continues to be highlighted.
The introduction of Consumer Duty came into force on 31st July this year. This is a new initiative from the Financial Conduct Authority (FCA) that sets higher and clearer standards of consumer protection across financial sectors, including banking – it basically requires firms to put their customers’ needs first.
In the run up to the introduction of Consumer Duty, one area of focus was the way that high street banks treat their customers, and they were asked to explain why they were being so slow to pass on the increases in interest rates to their long-suffering savings customers – their easy access customers in particular. According to the FCA, on average, nine of the biggest savings providers passed on just 28% of the base rate rise to their easy access deposits between January 2022 and May 2023. Over the same period, these nine providers did pass on more to their notice and fixed term bond accounts – but still just 51%.
As a result, the FCA has set out a 14-point action plan which will hopefully see banks and building societies offering fair value to their savers, or see the FCA take action.
As part of its action plan, the FCA will:
1. Require firms offering the lowest rates to provide their fair value assessments under the Consumer Duty by 31 August 2023 and take robust action by the end of 2023 against those who cannot demonstrate fair value.
2. Review the timing of firms’ savings rate changes each time there is a base rate change.
3. Publish an analysis every six months of firms’ easy access savings rates, listing distribution from best to worst.
4. Analyse the difference between on-sale and off-sale products, challenging firms to explain how large differences offer fair value and considering further action if this gap does not continue to close.
5. Review firms’ performance on cash ISA to cash ISA switching.
6. Conduct further analysis into the contribution of cash savings to firms’ profitability.
7. Review the effectiveness of firms’ engagement with customers by the end of March 2024 and take action if firms have not effectively delivered the outcomes the FCA has set out.
8. Work with others, including the Money and Pensions Service, to identify what more can be done to support consumers to save regularly, strengthening their financial resilience.
The FCA expects firms to:
9. Use their fair value assessments of on-sale savings products to assure themselves and the FCA, where needed, that these represent fair value for customers.
10. Accelerate their fair value assessments for off-sale accounts ahead of the July 2024 Consumer Duty deadline for off-sale accounts.
11. Take action to prompt their customers in lower paying savings accounts or non-interest bearing accounts to consider alternatives.
12. Closely monitor the effectiveness of customer communications, with larger firms providing the FCA with an evaluation by end 2023 and any follow up action they are taking.
13. Support consumer financial resilience by encouraging customers to start saving and/or search for higher rates, with the largest firms committing to support a targeted firm-by-firm communications campaign.
14. Consider how they can support their customers to access the free advice available from MoneyHelper.
Unfortunately, if this is expected to see a big increase in savings rates, especially from the worst offenders, there could be big disappointment ahead.
Some of the points laid out in the FCA plan have already be attempted in one way, shape or form, and were then abandoned. For example, following the FCA Cash Savings Review in 2015, they introduced the ‘Sunlight Remedy’ which was a list showing the lowest interest rates available on easy access savings accounts and cash ISAs. But this was soon abandoned as it made little difference, allowing the providers to continue with their old behaviour.
And a review of the speed at which the providers pass on base rate changes to their customers will soon be a moot point as we are approaching the top of this interest rate increase cycle. No-one is interested in the speed at which providers past on any rate cuts!
But what is hopeful is that providers will be required to inform their customers that there are better savings accounts available. I expect that initially this will simply be better accounts with the same provider, but it would be even better if they needed to inform customers of the best rates on the market – and how much more interest they could possibly earn in pounds and pennies.
Of course, no-one is forced to leave their money languishing with the worst providers and according to a recent article in The Sunday Times, our message finally seems to be getting though. George Nixon reports that savings customers ‘have pulled billions of pounds from the biggest banks in the past year as interest rates have improved and better deals have become available from smaller competitors.’
According to their latest financial reports, Barclays, Lloyds, NatWest and Santander have seen net outflows of £31 billion since the start of the year, from both savings accounts and current accounts. The latter is particularly interesting as current account usually pay no interest at all, so leaving too much in your current account means you are throwing money away. But according to the Bank of England, there is still some £270 billion pounds in non-interest bearing current accounts. That’s a lot of money that could be working harder.
One other aspect of the FCA's Consumer Duty regarding off-sale accounts will come into force in July next year, and those savings providers that pay terrible rates on old issues of off sale accounts will need to buck up their ideas. They will need to justify this poor behaviour – and hopefully that will be enough to improve conditions for those who struggle to switch their savings.
At the end of the day, whilst this is a step in the right direction, this whole plan is unlikely to put a complete end to savers’ misery – but those who are currently suffering with poor uncompetitive savings rate can do something about it right now.
Review, ditch and switch will continue to be our mantra at Savings Champion.
For up to date best buys, take a look at our Best Buy tables.
@savingschampion
Find us on Facebook