There’s no doubt cash savings rates have risen over the past 18 months, but the speed and amount passed on to savers has been under the spotlight by the Government, regulators and campaigners.

Banking bosses have been hauled in front of committees to defend their paltry rates, while today, the introduction of the Consumer Duty should mean there’s no place to hide when it comes to treating customers fairly – including on cash savings rates.

To tie in with the new fairer rules, the Financial Conduct Authority (FCA) has set out a 14-point action plan to ensure banks and building societies are passing on interest rate rises to savers appropriately, that they’re communicating with customers much more effectively and offering them better savings rate deals.

It comes after its review of the savings market revealed some sobering insights, including the “material delay” in passing on subsequent base rate hikes to savings – the base rate is expected to climb from 5% to 5.25% this week – that challengers have been leaders in increasing rates as the big banking giants don’t need to compete in the same way, and the general low level of switching to better paying savings accounts by savers to increase their financial resilience.

What did the FCA’s cash savings market review find?

An estimated £1.5trn is held in savings accounts (£1.95trn including NS&I deposits) across easy access, notice and fixed interest savings.

For easy access accounts where 60% of balances across nine of the largest firms (Lloyds Banking Group, HSBC, NatWest Group, Santander, Barclays, Nationwide, TSB, Virgin Money and The Co-operative Bank), the average interest rate rose from 0.07% to 1.25% between January 2022 and May 2023.

However, during that time, the base rate increased by 4.25 percentage points, meaning these big firms have passed through an average of 28% of the base rate rise. This is significantly down from the average 80% recorded between 2004 and 2009.

For fixed-term and notice accounts, the average interest rate has risen from 0.3% to 2.47% over the same period, with the scale of pass through increasing to 35% from August 2022 to May 2023 compared to 14% from January 2022 to August 2022. As of July 2023, the highest easy access rates range from 4% to 5%.

The FCA said it would expect a higher pass through and noted that the speed of pass through is slower for savings than mortgages.

“The big nine firms have been increasing their mortgage Standard Variable Rates (SVRs) broadly in line with the timing of base rate rises, whereas there has been a significant delay in the speed they have done so for savings rates. On average, firms have passed through 89% of the base rate increase to SVRs over the period.”

It also noted that the nine firms have increased their profitability by 245% between 2019 and 2022.

However, it does acknowledge that there’s not a direct relationship between savings rates and the base rate.

Smaller firms were found to offer higher easy access rates than the largest firms (a median of 3.7% compared to 2%). However, 75% of consumers with a savings account hold savings with their main current account provider, allowing them to “leverage” this advantage. Meanwhile, challenger banks hold approximately 8% of the personal current account market, compared to 1% five years ago.

While current account switching is up 70% from Q1 2022 and Q1 2023, the FCA found that only 23% of savers had switched their savings account in the last six months to get a better interest rate. Of those unlikely to switch their account in the next six months, 59% would be encouraged to do so by better interest rates on other accounts and 31% by an easier method of switching.

Indeed, not all firms are delivering against the existing commitment to switch at least 85% of cash ISAs within seven working days.

Elsewhere, the FCA revealed that many firms now pay the same rates on on-sale and off-sale equivalent products, but it did identify some outliers. Five major retail banks held approximately £260bn in easy access savings accounts offering 1% or less. Two firms were offering savings rates on their off-sale products of 0.30% or below.

Bank of England data estimates that approximately £250bn in deposits do not earn any interest at all.

At the same time, the FCA’s 2022 Financial Lives Survey (FLS) found that 70% of adults had a savings account of any type (37.1 million) but this is down from 2020 when 76% of adults (39.7 million) had a savings account.

But three in 10 adults (15.9 million) do not have a savings account of any type, an increase from 24% in 2020.

The FCA’s 14-point action plan

Firms offering the lowest savings rates will be required to justify by the end of August how those rates offer fair value, according to the Consumer Duty, which comes into force today. If they are unable to do so, the FCA said it will take action.

Firms will also need to step up their communications with customers about their options and measure the effectiveness of their communications campaigns.  Together with the Information Commissioner’s Office, the FCA recently clarified how savings providers could inform their customers about the best available rates, even where they had opted out of marketing.

This came after the firms cited data protection restraints in the General Data Protection Regulation (GDPR), which they said limited their ability to tell customers about better available rates, especially where customers have opted out of receiving marketing.

But the ICO and FCA clarified this to state firms can and should provide regulatory communications to all savings customers that provide neutral, factual information about the interest rate and terms of the savings product they hold, and their options for moving to another product.

Sheldon Mills, executive director of consumers and competition at the FCA, 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.

“We continue to urge savers to shop around to take advantage of the increasing number of better saving deals available.”

As part of its action plan, the FCA will: 

1. Require firms offering the lowest rates to provide their fair value assessments under the Consumer Duty by 31 August 2023 and take “robust action” by the end of 2023 against those who cannot demonstrate fair value.
2. Review the timing of firms’ savings rate changes each time there is a base rate change.
3. Publish a bi-annual analysis of firms’ easy access savings rates, listing distribution from best to worst.
4. Analyse the difference between on-sale and off-sale products, challenging firms to explain how large differences offer fair value and considering further action if this gap doesn’t continue to close.
5. Review firms’ performance on cash ISA to cash ISA switching.
6. Conduct further analysis into the contribution of cash savings to firms’ profitability.
7. Review the effectiveness of firms’ engagement with customers by the end of March 2024 and take action if firms have not effectively delivered the outcomes the FCA has set out.
8. Work with others, including the Money and Pensions Service, to identify what more can be done to support consumers to save regularly, strengthening their financial resilience.

The FCA expects firms to:

1. Use their fair value assessments of on-sale savings products to assure themselves and the FCA that these represent fair value for customers.
2. Accelerate their fair value assessments for off-sale accounts ahead of the July 2024 Consumer Duty deadline for off-sale accounts.
3. Take action to prompt their customers in lower paying savings accounts or non-interest bearing accounts to consider alternatives.
4. Closely monitor the effectiveness of customer communications, with larger firms providing the FCA with an evaluation by end 2023 and any follow-up action they are taking.
5. Support consumer financial resilience by encouraging customers to start saving and/or search for higher rates, with the largest firms committing to support a targeted firm-by-firm communications campaign.
6. Consider how they can support their customers to access the free advice available from MoneyHelper.