Cash savings: is the FCA finally showing its competition teeth?
02 August 2018
Since the Financial Conduct Authority (FCA) gained enhanced competition powers in April 2015, many in the industry have been waiting for the FCA to make a more radical competition intervention. Until now, it’s largely relied on demand-side remedies, such as improving disclosure and encouraging switching, to help consumers get a better deal. But that could be about to change.
Last week the FCA issued a discussion paper on price discrimination in the cash savings market. It follows the FCA’s 2015 market study into cash savings, through which it introduced a number of demand-side interventions such as improving customer communications and making it easier to switch. But having reviewed the effectiveness of these remedies several years on, the FCA concludes they have had little impact. And given its continued concerns that providers are taking advantage of customer inertia and treating long-standing customers unfairly through their pricing strategies, the FCA is proposing a more radical remedy to improve competition: introducing a basic savings rate (BSR).
The BSR would mean providers apply a single interest rate to cash savings accounts which have been open for a set period (e.g. 12 months). Individual providers could decide the level of their BSR. While this is a welcome step towards ensuring all customers receive a fair interest rate and not just those who are able or choose to shop around, there are some challenges involved. By holding back from suggesting a minimum rate for the BSR, the FCA gives rise to a risk that providers will merely set it at a low level to make up any revenue loss. Providers may also reduce headline rates to make up any loss – a risk the FCA acknowledges.
And arguably, the remedy’s effectiveness still relies in part on a change in consumer behaviour – will consumers still be swayed primarily by the headline, introductory rate, or will they look closer at the long term BSR? The FCA’s findings on consumer behaviour suggest the former is more likely.
Putting the finer details of this particular proposal to one side for a moment, the regulator’s move towards supply-side rather than demand-side competition remedies could have implications for market studies in other sectors. The FCA states in the discussion paper that ‘demand-side remedies alone do not always deliver all the outcomes we may want to achieve to protect consumers and facilitate competition’. And while it’s not clear to what extent the FCA believes this is down to unique features of the cash savings market in this case, we can reasonably assume from this paper that the FCA is likely to be questioning the effectiveness of demand-side competition remedies in other sectors.
But just how far are we, as an industry and society, prepared for the FCA to go to protect consumers and enhance competition? The FCA does suggest some more radical options in the discussion paper: a complete ban on price discrimination, requiring providers to transfer deposits to a comparable product when an account closes to new customers, and setting a maximum ratio between new interest rates and rates on accounts that have been open for a certain period of time. But it’s concerned about the unintended consequences of these remedies, suggesting that restricting firms’ ability to set their own interest rates could have an adverse impact on funding models, or that certain measures could disadvantage challenger banks. If providers can’t alter their pricing strategies to shed or attract deposits, the FCA reasons, they may not be able to manage their funding requirements in times of stress.
As ever, the FCA has a difficult job to do in balancing its competition and financial stability objectives. Perhaps there is only so far the FCA can go to promote competition before it crosses the line into risking the proper and healthy functioning of financial markets.