FCA update on cash savings - September 2024

As we set out in our non-Handbook Guidance for firms on the Consumer Duty (FG22/5 (PDF)), fair value is about more than just price. To assess whether a product provides fair value, firms will need to assess whether the amount paid for the product (including any non-financial costs) is reasonable relative to the benefits that a customer can reasonably expect to receive from the product.

The better FVAs we reviewed were evidence-based reviews of financial and other benefits provided to customers by a savings account product (eg access to branches or other in-person access facilities, access to other related products, etc). However, many FVAs were not sufficiently testing and tended to seek to validate previous pricing decisions. Many FVAs lacked appropriate data and analysis to support the conclusions.

Under the Consumer Duty, and as set out in FG22/5, firms are required to identify a target market for their products and consider how they expect these customers to use the product. For example, firms could choose to consider whether the product is intended for short-term use or as a long-term savings vehicle and use this to specify a target market. Firms may, for example, consider whether the product is targeted at customers starting to save, building a savings balance or wanting to maximise returns. Equally firms which offer high levels of customer support and branch access should reflect that in their definition of the target market for these accounts.

Firms may group similar savings products together and complete a single FVA if the customer base, complexity and risk of consumer harm are sufficiently similar (see FG22/5). However, in this case, a firm must ensure the FVA adequately assesses the value of each account it includes. We often found that FVAs which considered several accounts were not sufficiently granular and did not clearly set out the assessment for each account product. Some firms chose to include widely grouped account categories (eg instant access, restricted access and fixed-term accounts) within a single FVA, when these should have been separately assessed. 

When assessing fair value, firms may find it appropriate to benchmark products against comparable products in the market. While consideration may focus on price aspects, there may be other key non-price aspects that firms wish to benchmark against.

In better examples we saw, firms compared accounts against easy access accounts across the market, including those offering market leading rates, and other accounts offered by the firm. Some FVAs did not compare rates at all, or only chose to benchmark against a lower peer group, avoiding comparison with market leaders. If a firm chooses to benchmark its accounts against only low paying accounts, or a subset of competitors, this is unlikely to represent effective benchmarking.

If an interest rate for a savings account is an outlier compared to the rate for similar products, we would expect a firm to evidence how the account nevertheless provides fair value. This might include benchmarking other aspects of value - such as service standards, branch availability or other non-price benefits - along with evidence that customers use and value these services.

The greater an account is an outlier compared to similar products, the greater the onus on a firm to assess its value more rigorously. Many FVAs we reviewed, however, did not set out a clear rationale why an account that was low-paying relative to comparable accounts was nevertheless assessed to provide fair value.

The Consumer Duty does not mean different groups of customers cannot receive different outcomes from the same product. However, firms should consider whether the product provides fair value for customers in each group. We expect firms to use relevant customer data to proactively identify customer groups and monitor their outcomes to ensure consumers in all groups are receiving fair value.

The better FVAs we reviewed identified core customer groups within accounts’ target markets, for example customers starting to save, low balance/high transaction customers and customers who maintain high balances, and considered the value received by each customer cohort. The best FVAs also set out actions the firm will take to improve outcomes for those customer groups who were receiving lesser outcomes. Examples of actions taken by firms included well targeted outbound communications to customers maintaining high balances in easy access accounts and increases to relevant interest rates. 

Other, less developed FVAs did not consider whether an easy access savings account may have diverse groups of customers using it for different purposes, and accordingly did not set out any actions to address customer groups receiving potentially poorer outcomes (for example, customers leaving large balances for long periods in lower paying easy access accounts who might be harmed by lower interest rates combined with ineffective customer communication and support).

Additionally, in our review – as we set out in further detail below (see ‘taking appropriate action’ section) – some firms failed to take appropriate action when data suggested significant groups of customers may not be receiving fair value. For example, we noted accounts which required customers to renew an annual bonus to retain a higher level of interest but most customers failed to do so, and the firm had failed to take appropriate action to address customers’ lack of engagement with its bonus process.

While firms can use existing data to help assess whether a product provides fair value, they should not assume that this data will provide all the information they require. We want firms to think about what information they need to understand the issues their customers face and the outcomes they receive, rather than only relying on existing data.

Consumers with characteristics of vulnerability may have additional needs and be at greater risk of harm if things go wrong. The Consumer Duty requires firms to pay particular attention to the needs of these customers. We expect firms to apply the Consumer Duty alongside existing guidance and we remind firms that FG21/1 (PDF) sets out our expectations that firms should:

• monitor and assess whether they are meeting and responding to the needs of customers with characteristics of vulnerability and make improvements where this is not the case
• produce and regularly review management information, appropriate to the nature of their business on the outcomes they are delivering for vulnerable customers
• be able to provide us with the information they are using in order to monitor whether their customers with characteristics of vulnerability are achieving outcomes that are as good as those for other customers and are receiving consistently fair treatment

We did not see evidence that many firms had fully assessed the outcomes for customers with characteristics of vulnerability.

The better FVAs we reviewed proactively considered what characteristics of vulnerability easy access savings customers may have (for example, customers with limited digital capability, poor financial resilience or in poor health) and whether these customers were receiving fair value.

Less developed FVAs inappropriately relied on customers to self-identify and declare vulnerability rather than firms proactively considering it themselves. Many FVAs were unable to identify and monitor outcomes for customers in vulnerable circumstances due to gaps and limitations in management information. We expect all firms who are unable to effectively monitor outcomes for vulnerable customers to have clear plans in place to address this shortfall, in line with the requirements of the Duty (PRIN 2A.4.8R(4)) 

Firms’ assessments of value may include contextual factors about a firm’s business model, where relevant. This is particularly the case with savings accounts, where firms must balance business models that offer lending and savings. Where a firm is relying on these factors to justify its fair value conclusions, this reasoning should be clearly articulated within FVAs to enable it to be challenged as part of firms’ governance.

Contextual factors may include:

• Costs to manufacture or distribute the product.
• Characteristics of a firm’s business model, including – for example – the extent of cross-subsidies between different products.

Incorporating factors such as the above with supporting evidence in an FVA can provide necessary context to understand pricing decisions.  

There is no requirement that firms must include costs in assessments of value, but understanding the margins that a product earns can be useful context for firms’ governance to assess fair value. If a firm seeks to justify a lower interest rate than peers, or other products it offers, principally based on the costs it incurs to provide that product, we expect to see a clear rationale within the FVA.

For firms that provide a range of products and services, understanding the cost of supplying each product or service can be complex. However, some firms chose to include a cost analysis in their FVAs. In those FVAs that included an assessment of costs, we found the better FVAs demonstrated a clear analysis of the relationship between the interest rate offered to customers and the relevant costs to the firm of providing the product. Other FVAs used the firm’s cost to serve without explaining its basis or providing any challenge as to how different customers might be affected. We consider these FVAs lacked sufficient assessment.

The degree of cost analysis within FVAs is for firms to consider, but where it is used the analysis must be sufficiently clear to enable the assessment of fair value to be undertaken.

The Consumer Duty requires firms to take appropriate action if they identify that customers are not receiving fair value (PRIN 2A.4.25R) or that any group of customers are receiving worse outcomes than another for the same product (PRIN 2A.9.12R).

In these circumstances, the best FVAs we reviewed set out the steps the firm was taking to mitigate harm, which included increasing interest rates and improving customer communications. Other less developed FVAs acknowledged poor outcomes but did not set out appropriate actions. 

These FVAs often set out the firm’s intention to write to customers to simply inform them that they were receiving a low rate, rather than to address the harm more proactively and substantively. Firms must ensure their communications equip retail customers to make decisions that are effective, timely and properly informed (PRIN 2A.5.3R) and (where appropriate) regularly monitor the impact of the communications (PRIN 2A.5.10R).

The Consumer Duty sets out that firms must not rely on customers to consider whether the product provides fair value in place of the firm’s own assessment (PRIN 2A.4.20R). Simply alerting customers that they are on low rates may contribute towards meeting the consumer understanding outcome, but it would not satisfy the Duty’s requirements not to offer poor value products in the first instance. Please see our Customer Communications update below.

Firms’ assessments of value should be supported by evidence and not simply seek to justify previous pricing decisions. Any fair value conclusions should be supported by evidence and reasoning throughout the FVA. Firms should ensure that the focus on achieving good customer outcomes is understood at all relevant levels of the business.

Firms’ FVAs should contain appropriate data and metrics to identify and track outcomes for different groups of customers. We appreciate that firms may still be refining their approach to their FVAs and developing required data capabilities. In these instances, firms should consider and identify proposals to develop their capabilities with clear timelines as well as actions on how they will identify and mitigate foreseeable harm in the meantime.

Some firms have developed data and monitoring strategies to better understand customer outcomes. Where FVAs identified areas of concern, such as differential outcomes leading to foreseeable harm for groups of customers, we have seen some firms follow this with detailed actions to reduce harm.

Less positively, we have seen some firms fail to identify products that are not performing as designed and producing poor outcomes for many customers. For example, we noted accounts which required customers to renew an annual bonus to retain a higher level of interest, but most customers failed to do so, and this was not identified as a concern within the FVA.

The tables below show the improvement in the average interest rate paid on easy access and fixed-term and notice deposits between the publication of our July 2023 report and end June 2024.

The base rate has reduced by 25 basis points to 5.00% since our previous update. The fact that average rates paid to savers generally continued to increase prior to this suggests greater competition in the savings market is having an effect.

Savers continue to move deposits from non-interest-bearing accounts and into higher paying fixed-term and notice accounts. From July 2023 to June 2024, the volume of deposits held in bank and building society non-interest-bearing accounts reduced by £14bn to £252bn. During the same period, deposits held in fixed-term and notice accounts increased by £29bn to £274bn. Easy access deposits have remained broadly stable since July 2023 at £909bn.

Much higher rates are available than the market average, including many that currently pay 5% or higher (for both easy access and fixed-term deposits). The latest data (12 August 2024) shows there were c327 instant / no notice open accounts available paying over 3%, which includes 174 over 4% and 11 over 5%. We note the very significant reduction in accounts paying <1% since publication of our July 2023 Review.

We continue to encourage savers to shop around, and our recent savings campaign prompted 71% of people who engaged with the campaign to shop around for a better rate.

We have concluded this action (publishing an analysis every 6 months of firms’ open and closed easy access savings rates, listing distribution from best to worst) is not an effective use of resources given widely, freely available comparison websites and best buy tables.

We do not intend to publish this data again.

Following our December 2023 update, we have analysed the rates available on the Big 9’s easy access products by comparing the median rates for open and closed easy access savings accounts.

Our analysis highlights that median rates for open easy access savings accounts improved slightly by 0.5ppt since the publication of our July 2023 Review, with median rates for closed accounts improving slightly less, only moving 0.4ppt. Open easy access rates fell in March 2024, which we expect was driven by firms repricing products in anticipation of any base rate reductions. Firms are continuing to offer higher rates on open products than closed products.

From July 2024, the Duty applied to both open and closed products, and we expect any differential pricing between open and closed products to be justified by a clear rationale in the relevant FVAs.

A voluntary industry agreement sets a target for firms to complete a minimum of 85% of cash ISA to cash ISA transfer requests within 7 working days. Our July savings report contained the Big 9 firms’ commitment to increase this target to 90%.

The table below shows the proportion of all cash ISA transfers completed within 7 working days across the Big 9.

Source: UK Finance. We have calculated these figures based on UK Finance data. UK Finance collect firm-level data on cash ISA to cash ISA transfer performance. However, as some of the data has been manually submitted from firms, UK Finance cannot guarantee the completeness or accuracy of the data.

We want to see continued improvement in the speed of transfers and will continue to engage with those firms who are not meeting the voluntary target of 90%.