Consumer Duty brings easy access savings accounts back into the spotlight

April 2023

By Tessa Norman

As the FCA developed its Consumer Duty rules, easy access savings accounts didn’t stand out as an obvious flashpoint for the banking sector. After all, the regulator has said it will focus (at least initially) on products or services that pose the biggest risk of harm to consumers - and the risk posed by a savings product is relatively low. The most vulnerable consumers have no savings at all; the FCA’s latest Financial Lives survey (October 2022) estimates that 10% of UK adults hold no money in savings or investments.

But in a rising interest rate environment and amid cost of living pressures, public scrutiny has been growing over the value of savings rates, and the extent to which banks pass on higher rates to savers, particularly for easy access accounts.

The Treasury Select Committee (TSC) has the issue firmly in its sights - questioning whether banks are ‘taking advantage’ of customers’ loyalty and reluctance to switch products. In letters to the largest retail banks, the Committee also questioned banks on the rates paid on easy access savings accounts, and how they pass increases in the base rate onto savers. Others have raised similar questions, with union Unite claiming that the four largest banks had made an extra 7bn from interest rate rises between 2019 and 2022.

The FCA has also voiced concerns about easy access savings products, and the introduction of the Consumer Duty - with its focus on fair value and good outcomes for all customers - is likely to bring these back to the fore.

So against this backdrop of heightened scrutiny, how can firms demonstrate that they’re meeting the higher standards of the Duty in this market?

Outcomes for long-standing customers

Back in January 2020, the FCA consulted on potential measures to improve competition for long-standing easy access cash savings and cash ISA customers. The regulator didn’t take the proposals forward due to capacity constraints during the pandemic, but the concerns it raised as part of this work provide valuable insight into what firms need to do to meet its expectations under the Duty.

The FCA found that easy access savings providers typically compete strongly for new customers by offering high introductory interest rates - but, partly due to customer inertia and loyalty, once introductory rates end, a large proportion of customers keep significant balances in low rate paying products. The FCA’s Financial Lives Survey found that only 10% of easy access cash savings and cash ISA customers had switched in the last three years. The FCA said at the time it was concerned that a large number of long-standing customers were receiving poor outcomes, and that some firms were relying on ‘consumer inertia and unnecessary complexity’ to keep rates low.

These concerns will be front of mind for the regulator as it supervises the Duty.

Under the Duty, firms will have to demonstrate that all groups of customers receive fair value across the life of the product (i.e. extending beyond any introductory rate period). They will also need to demonstrate that they are not exploiting customers’ behavioural biases (such as inertia), to show they’re meeting the cross-cutting rules to act in good faith and avoid causing foreseeable harm.

Delivering fair value

The FCA’s February 2023 Consumer Duty Dear CEO letter for retail banks and building societies called out cash savings accounts, particularly with regard to fair value, as an area of concern. The letter prompts firms to consider a number of factors, including: whether their approaches to introductory rates or other differential pricing practices are exploiting some savers’ loyalty, inertia or other behavioural biases; and the approach firms take, in pace and degree, to moving their interest rates for savers following base rate moves.

In their value assessments, banks need to be really clear about the benefits their savings products offer, and about pricing strategy and associated costs of the product. Banks will need robust and consistent rationale for their pricing, including their approach to moving rates following base rate increases - and be able to demonstrate how they subject this to adequate internal scrutiny. Market analysis will quickly be challenged as an input to value assessments; just because other savings rates are low doesn’t mean that’s fair.

Firms need to look at data – savings account activity, account closures, movements in interest rate margins, rates of fees being levied, comparative views against interest-linked products, and the new consumer outcome MI that should be in place, or planned. Ultimately, these will be the documents the regulator will ask for, and challenge.

Equipping consumers to make effective decisions

The consumer understanding outcome of the Duty will also be key to meeting the FCA’s expectations in this market. Firms should review how they communicate with savers throughout the customer journey. Communications at the point of sale need to clearly explain the length of any introductory rate period and what happens when it ends. At the end of an introductory rate, firms should equip customers to make decisions that are in their interests - for example, by clearly setting out the options available to them, such as switching to a different savings product offered by the provider.

Firms should regularly test how effective communications are in encouraging customers to engage and make better informed decisions. They should also tailor communications to their target market, and may wish to consider using different communications for different groups - for example, those who’ve held high balances in low rate paying products for a significant period, or for those with characteristics of vulnerability.

While consumer inertia is a long running and challenging issue to tackle, the Duty raises the bar and puts a clear onus on firms to demonstrate that they are not exploiting customers’ behavioural biases. Carrying out robust value assessments and using targeted and effective communications will be key to evidencing this - and the FCA will expect firms to take prompt action if they identify that some groups of savers are not receiving fair value.

With the FCA’s latest Business Plan making clear that the regulator intends to 'actively supervise' the Duty from day one, with a focus on the sector-specific issues raised through its portfolio letters, its's clear that demonstrating the value of easy access savings rates for all customers should be high on firms' list of priorities.