On 31 July, 2023, the Financial Conduct Authority (FCA) released a 14-point action plan to ensure that banks and building societies pass on interest rates to savers appropriately.
The call to create the action plan came following a revelation from the Bank of England (BOE) that approximately £250bn ($310bn, €291bn) is sitting in deposits that do not earn any interest. Further to this, the FCA also discovered that the largest lenders in the country have only passed on 28% of base rate increases to easy-access accounts.
Since December 2021 the Bank of England’s base interest rate has risen from 0.1% to 5.25% in August 2023. And the reason for this stark increase is unusually high inflation rates; in October 2022, inflation reached a 41-year high of 11.1% which now sits at 6.8%.
However, despite the high interest rates, there has been speculation as to whether financial institutions have fairly passed on these rates to savers. The FCA aims to tackle this and make cash saving fairer.
The Action Plan
The action plan itself is split into two sections; what the FCA will do and what the FCA expects firms (financial institutions and banks) to do.
It promises to:
• Ensure firms that offer the lowest rates provide fair value assessment under Consumer Duty by 31 August 2023. Those who cannot demonstrate fair value must take action by the end of 2023.
• Review the timing of firms’ savings rate changes when the base rate changes.
• Publish an analysis of firms’ easy access savings rates every six months.
• Analyse the difference between on-sale and off-sale products, challenging firms to explain how large differences offer fair value and urge action if the gap does not close.
• Review firms’ performance on cash ISA to cash ISA switching.
• Conduct further analysis into the contribution of cash savings to firms’ profitability.
• The effectiveness of a firms’ engagement with their customers to be reviewed by the end of March 2024 and action to be taken if firms haven’t delivered the outcomes set by the FCA.
• Identify what more can be done to support consumers to save and strengthen their financial resilience. This will be done in partnership with others, including the Money and Pensions service.
While the FCA can make a huge difference when it comes to fairness, they can’t do it without collaboration with firms. So, as per the action plan the FCA expects firms to:
• Use fair value assessments of on-sale savings products to assure they are providing fair value for customers.
• Accelerate their fair value assessments for off-sale accounts ahead of the July 2024 Consumer Duty
• Take action to encourage their customers in lower paying savings accounts or non-interest-bearing accounts to consider more fruitful alternatives.
• Closely monitor the effectiveness of customer communications. Larger firms must also provide an evaluation to the FCA by the end of 2023.
• Encourage consumer financial resilience by encouraging consumers to begin saving and search for higher rates. Large firms must support a targeted communications campaign.
• Help and encourage their customers to access free advice available from MoneyHelper.
How will it help cash savers?
The new action plan has set higher standards for consumer protection when it comes to financial services, as well as outlining clearer expectations which firms can adhere to.
With these stricter rules in place, the saving and investment market should become a fairer place for those looking to boost their finances. And, if all goes to plan, the lowest rates won’t be so low anymore, meaning everyone’s savings should reap higher returns.
At such a pivotal time in the world of cash savings, it’s a great time to take advantage of high interest rates and the fact that firms are required to provide fair rates and advice. Using a cash management platform is one way that savers can make use of these new requirements.
Cash Management Platforms and the flight to cash
Cash management platforms offer an online service for businesses, charities, individuals and financial advisors to save, hold, move and manage their savings in a flexible and hassle-free way while also benefiting from some of the best rates on the market.
Once onboarded onto these platforms, users are regularly notified when new rates become available and can switch accounts easily without the lengthy sign-up documents, and with the new FCA guidelines, these rates should provide better returns than ever.
To provide an example of the potential benefits that customers of cash management platforms can achieve, let’s consider a scenario where a user deposits £1 million over a two-year period. In such cases, it’s possible to earn competitive interest rates, potentially reaching up to 6%. This can result in substantial interest earnings, such as £123,600.
Furthermore, using a cash management platform allows you to diversify your funds across multiple accounts, thereby reducing risk and enhancing your Financial Services Compensation Scheme (FSCS) protection.
The bottom line
In light of recent regulatory changes aimed at improving the treatment of savers and their access to competitive interest rates, the financial landscape is more enticing than ever for short-term savers.
This is especially relevant for those who wish to deposit up to £20,000 annually into a Cash ISA to stay within the personal savings allowance limits.
Considering these opportunities, now is an excellent time to explore options for optimising your cash savings.
This article was written for International Adviser by Andrew Waring, director of intermediary at Stubben Edge.
