Banks have been given four weeks to justify low savings rates to the City regulator, before facing “robust action” as part of a fresh crackdown on the UK savings market.
The deadline is part of a 14-point action plan unveiled by the Financial Conduct Authority (FCA) on Monday, after it found the UK’s largest banks had passed on just over a quarter of UK interest rates rises to the most popular savings accounts, while mortgage and loan charges have soared.
Lenders with the lowest savings rates will have until the end of August to explain how those rates represent fair value to customers. Those that fail to justify their pricing decisions will face “robust action by the end of 2023”, the watchdog said, adding that its full range of powers – which include fines – would be at its disposal.
The FCA’s plan will involve monitoring how quickly banks pass on savings rates to customers and publishing an “analysis” of firms’ easy-access savings rates where it will name and shame laggards. Lenders will also have to encourage customers to search for accounts offering higher rates.
While the FCA does not expect banks to match the Bank of England’s base rate – which has hit 5% and is expected to rise for a 14th consecutive time when policymakers meet again this Thursday – the regulator wants lenders to pass benefits to savers within “weeks” of a central bank interest rate rise.
“Our opinion is that, absent exceptional circumstances, you should be thinking [of changing savings rates] within a couple of weeks of a base rate change and going through your pricing decisions to move your savings rates. And that is all about getting the value to the savers,” said Sheldon Mills, the FCA’s executive director in charge of consumers and competition.
It follows the watchdog’s month-long review into the savings market, which found nine of the biggest savings providers – including Lloyds, NatWest, HSBC, Santander UK and Nationwide Building Society – passed on only about 28% of interest rate rises to easy-access savings accounts between January 2022 and May this year.
It meant the average interest rate on those accounts rose only from 0.07% to 1.25% over that period, even as the Bank of England rate rose from 0.25% to 4.5%.
Even on fixed-term savings, which require customers to lock in their money for a set period of time, only 51% of base rate rises were passed on to customers. That compares with an average 80% pass-through of interest rate rises between 2004 and 2009, the FCA said.
The regulator said it would “conduct further analysis” into how cash savings are contributing to bank’s profits. Interest rate rises have driven a surge in profits at many high street banks including NatWest and Barclays, both of whose earnings rose by about 30% in the second quarter, compared with the same period last year.
Mills said: “We want a competitive cash savings market that delivers better deals for savers, where interest rates are reviewed quickly following base rate changes and firms prompt savers to switch to accounts paying higher rates.
“We welcome the progress that has been made so far but this needs to speed up. We will be using the Consumer Duty to ensure this is the case – with firms required to prove to us that they are offering their customers fair value.”
While the big four UK banks – Lloyds, HSBC, NatWest and Barclays – say they offer a range of products with higher returns, interest rates on easy-access savings accounts have broadly languished below 2%.
Rocio Concha, the director of policy and advocacy at the consumer group Which?, said: “Some high street banks have been offering meagre rates to customers for a long time, and it is clear the pace and scale at which rates are passed on to customers needs to be improved, so it’s good to see the regulator clamping down.”
The FCA’s 14-point plan in full
The FCA will:
1. Require banks offering the lowest savings rates to justify their decisions, with those that cannot demonstrate fair value by the end of 2023 facing “robust action”.
2. Review how quickly banks change their savings rates after Bank of England interest rate decisions.
3. Publish analysis of banks’ easy-access savings rates, listing offers from best to worst.
4. Analyse any difference in rates between savings products currently on offer, and those that are closed to new customers. The FCA will challenge banks to explain any differences and will consider taking action if the gap goes unaddressed.
5. Review whether banks are making it easy for customers to switch between cash Isa accounts.
6. Conduct further reviews into how cash savings are contributing to bank’s profits.
7. Review how firms are engaging with customers by the end of March 2024, and take action if firms fail to deliver on the FCA’s planned outcomes.
8. Work with groups including the Money and Pensions Service to figure out what more can be done to support customers to save regularly and strengthen their financial resilience.
The FCA expects banks to:
9. Determine and justify whether savings products currently on offer represent fair value for customers.
10. Confirm whether savings rates on products that have closed to new customers offer fair value. This should be done before those closed products come under consumer duty regulations in July 2024.
11. Prompt customers using savings accounts with lower rates, or those with no interest, to consider alternative accounts with higher rates.
12. Closely monitor how effective their customer communications are, and report this to the FCA by the end of 2023, alongside any follow-up action they are taking.
13. Encourage customers to start savings or search for higher rates.
14. Consider how they can support customers to access free advice available from the government-backed online advice service MoneyHelper.
