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The FCA recently published a consultation paper (CP) proposing  a Single Easy Access Rate for cash savings. This blog summarises the proposals, sets out their implications, and outlines actions firms should consider.

The Proposal

Under the new rules proposed in the consultation, firms will have to offer customers a single rate of interest across all of their easy access savings accounts open for longer than 12 months, with this interest rate being set by the firm. This interest rate will be called a Single Easy Access Rate (SEAR). This means that while firms can continue to offer introductory rates of interest on easy access savings accounts for an initial 12 month period, all their easy access savings accounts will have to offer the SEAR after this period. Firms will be allowed to set two SEARs; one for their easy access cash savings accounts and one for their easy access cash ISAs.

While the FCA is now calling their proposed reform to the cash savings market a SEAR, it is in effect the same as their earlier proposal for a basic savings rate. The FCA says that it has changed the name in order to enhance consumers’ understanding of what the rate is and what it will offer consumers.

The FCA’s SEAR proposals build on a number of important trends we have observed within the FCA’s regulatory and supervisory approach, namely:

  • a greater willingness to intervene in the prices firms can set in markets;
  • the prioritisation of the risk of harm to vulnerable consumers; and
  • a focus on the value for money firms provide, in particular for longstanding consumers.

The proposed reforms have the potential to change the competitive dynamics of the cash savings market, with the FCA expecting longstanding customers to receive higher rates of interest on their easy access savings.

Timetable

The FCA will be accepting responses to its CP until 9th April 2020. It will publish its final set of rules in the second half of 2020.

What problem is the FCA trying to tackle?

The FCA’s cash savings market study found that, due to a lack of competition, longstanding customers generally receive much lower rates of interest on their savings compared to customers who have opened their accounts more recently. In line with the FCA’s commitment to ensure fair pricing in financial services (which we have blogged about here) the FCA has used its 6 question ‘fair pricing in financial services’ framework to judge the fairness of the pricing practices it observes in the cash savings market. This is the second time the FCA has used this framework, following on from its initial use in the FCA’s GI pricing market study, and we expect this framework to play a leading role in future market studies.

The FCA found that harm was likely to be widespread: three quarters of consumers have an easy access cash savings account, but only 10% of these consumers had switched their account in the past three years. The FCA also found that customers with signs of potential vulnerability were more likely to have held their savings account for 10 years or more with the same savings provider. Given this, the FCA says it is “concerned that there are poor outcomes for a large number of the most longstanding customers” as a result of what the FCA considers to be unfair price discrimination when it comes to the interest they earn on their savings.

Figure 1 (below) shows how the typical rate of interest on easy access accounts declines over time, from ~0.7% for accounts opened in the past year to ~0.3% for accounts open more than 5 years ago. Furthermore, the vast majority of consumers’ balances are held in accounts which have been open for more than five years, meaning most consumers receive these lower rates of interest rather than the higher introductory rates on offer. This has led the FCA to conclude that longstanding customers often receive much poorer value for money on their savings than newer customers.

Propotion of balances

Source: FCA, Introducing a Single Easy Access Rate for cash savings, CP20/1, p5

The FCA’s SEAR proposals are intended to tackle the unfair price discrimination and poor value for money the FCA considers longstanding cash savings customers receive. The FCA hopes that its reforms will lead to firms competing on the SEAR, and that this competition will drive up the rates of interest on offer to consumers.

Alongside its proposals to introduce a SEAR, the FCA is also putting forward a requirement for firms to publish their SEARs, alongside data on the proportion of customers’ balances held in easy accounts that are on the SEARs, and the highest introductory interest rates on offer for easy access savings accounts. The FCA hopes that by making this information easy to find, it will encourage consumers and third party organisations (including online comparison tools) to look at both the SEARs and introductory rates when switching or open savings accounts; and that this in turn will drive banks and other savings providers to compete to offer the best interest rates on savings.

Implication for firms

The FCA’s proposed reforms to the cash savings market are another example of the FCA’s increasing scrutiny of value for money and price discrimination. The reforms follow on from its continuing work in the general insurance and asset management sectors, and previous work around high cost credit. In short, the FCA is proactively targeting mass market retail products that it judges to provide poor value, with a particular focus on the value received by longstanding or back book consumers, who are in turn more likely to be potentially vulnerable.

More specifically, firms will want to assess how paying potentially higher rates of interest to their longstanding customers is likely to affect their business model and wider market strategy. A key question will be whether they want to offer market leading SEARs to their customers in order to attract and retain deposits. Firms will also need to assess what effect the FCA’s reforms may have on their liquidity and the assumed ‘stickiness’ of easy access savings deposits.

Firms may also benefit from reviewing their existing range of savings products and, where sensible, simplifying their range of products to dovetail with the FCA’s SEAR proposals which will likely limit the benefit of firms having a wider product range.

Firms should consider looking at enhancing the transparency and disclosure around the interest paid to longstanding cash savings customers. In line with the FCA’s promotion of good customer outcomes, it will expect firms to be active in identifying customers who may be receiving poor value and for firms to take action to correct this; for example, by encouraging such customers to switch to savings products with better rates of interest.

In summary, pending publication of the FCA’s final rules, we think firms would find it beneficial to:

  • analyse how paying higher rates of interest to longstanding cash savings customers is likely to change their funding model and demand for deposits;
  • review whether, and if so how, their range of cash savings products might usefully be simplified;
  • examine how transparency and disclosure around the interest paid on their back book savings products might be enhanced; and
  • encourage customers at risk of, or likely to be receiving, poor outcomes to switch to a newer savings product.
Andrew Bulley

Andrew Bulley - Partner, Centre for Regulatory Strategy

Andrew Bulley joined Deloitte in October 2016 from the Bank of England, where he was, most recently, the Director of Life Insurance Supervision. Between 2014 and 2016 he was a UK voting member of the Board of Supervisors of the European Insurance and Occupational Pensions Authority (“EIOPA”). In a career with the Bank of England and Financial Services Authority stretching over 27 years, Andrew has held senior roles in the supervision of life and general insurers, the London wholesale insurance underwriting and broking markets, retail and investment banks, asset managers, and IFAs.

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Felix Bungay, Senior Manager, Centre for Regulatory Strategy

Felix is a Senior Manager within the EMEA Centre for Regulatory Strategy, where he focuses on conduct regulation across a range of financial services sectors. Prior to joining Deloitte, Felix worked at the FCA where he helped produce a wide range of the organisation's House and Sector Views, including those on Retail Banking and Lending, Retail Investments and Wholesale Capital Markets.

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