Markets drive efficiency through competition. This is a basic principal of market economics which, according to the Financial Conduct Authority (FCA), is stagnating in the UK’s £700bn cash savings market. The 2015 Market Study Report highlighted that lenders in the deposits market are not pushing each other to offer the best possible rates for savers. Instead, consumers are being kept in the dark when it comes to market availability without access to a forum that allows them to compare rates as they would with any other product.
The FCA’s proposed ‘switching box’ will clarify this process, allowing consumers to access an online space that provides a clear overview of the market. Lenders with high rates who have been able to acquire and maintain customers using attractive policies and complex jargon will need to be more transparent and perhaps re-think their pricing strategies in order to maintain market share.
Reactions to the proposals within the banking world have been broadly positive. The June 2015 Financial Services Survey reported that the majority of savings institutions seem to be backing the new regulations with particular support for the more prominent display of interest rate information. Respondents also made a number of further suggestions regarding additional information in the summary boxes. These included the provision of cash examples or examples showing the interest a consumer would earn over several years as well as some helpful definitions, which might appear in the summary box, such as ‘variable’.
However, there were also some concerns raised which could be categorised into three key themes, the first of which being that the market would become too ‘rate focused’. Many providers questioned whether the explicit focus on interest rates would lead to customers ignoring other valuable features such as rights to withdraw. Providers may be forced to over-compensate on other areas in order to deliver on rates and have less incentive to innovate and improve their broader banking experience.
The second concern referred to the problems associated with advertising the interest rates offered by competitors. The new regulations would require banks to inform customers of competitors’ rates and respondents raised concerns over keeping up to date with information and the possibility of customers viewing this type of communication as marketing material. The final criticism referenced the overall cost of including personalised information, in particular personalised cash illustrations. Indeed, one provider suggested that it would be equally effective though far less costly to provide generic information based on the typical balance for a customer segment.
The FCA’s response has been to acknowledge the concerns but proceed with the original goal of providing savers with a space that allows them to ‘shop around’. Consumers and industry professionals had until 12th October 2015 to make further comments, the FCA will now review all feedback and decide whether to re-consider its proposal. That notwithstanding, the new rules will be likely to come into effect in the middle of next year and will undoubtedly mean that the banks and other lenders who place priority on maximising data analytics, and understanding more sophisticated pricing criteria, will be the ones to benefit from the new initiative.
Damian is a career banker with more than 25 years of experience. He spent most of his career with Bank of Ireland where he held a number of senior roles, including Head of Deposits and Current Accounts, Head of SME Banking and Head of Customer Management and Customer Analytics. At Nomis, Damian is Managing Director responsible for the APAC region.