James Daley

By James Daley

We’re now just 11 days away from the implementation of the FCA’s new Consumer Duty. One of the more interesting challenges that firms are being forced to get to grips with is proving that they are offering fair value. This has been particularly difficult for banks – who are wrestling with how to justify the amount of interest they pay on their current and savings accounts as we return to a high interest rate environment for the first time in 15 years.

Unlike in most other countries in the world, most people in the UK don’t pay directly for their current account. Instead, banks generate their income through foregone interest and via other fees and charges for services like overdrafts and foreign usage.

When interest rates were close to zero, the amount of interest that customers were foregoing on their current account balances was minimal. As a result, it was much easier for banks to make the case that they were offering value to customers. For those who stayed in credit, they were losing only a few pounds a year in interest, in return for use of all the essential functions that current accounts provide – direct debits, standing orders, online banking and so on.

But with interest rates at 5%, the fair value equation starts to fall apart quite quickly. In spite of rising political pressure to pay better rates on savings accounts, most of the big banks are continuing to pay no interest on current accounts, and fairly poor rates on their mainstream easy access savings accounts. Our data at Fairer Finance shows that 78% of regular current accounts still pay no interest at all.

Safety in numbers

It would seem as though banks are relying on safety in numbers – and holding out for as long as they can to milk the opportunity to widen their interest margins. But if we don’t see some changes over the next few weeks, the FCA will surely have to speak out and remind them that they are now in breach of the new Consumer Duty rules.

This is a live conversation in most bank boardrooms. And it’s clear that some banks are already manoeuvring to sharpen up their offer. Earlier this month, First Direct announced it had scrapped all its overseas charges for its current account holders. As one of their customers, who travels relatively often, this definitely shifted the value dial for me.

Nationwide has also now started paying 1% on its main current account - in addition to the 5% that it pays in the first year.

But most banks have not blinked yet.

Backbook accounts - an even bigger problem

When it comes to savings accounts, the picture is even more complicated. Although there’s been a lot of focus on the rates being paid on frontbook easy access accounts – the picture is a real mess when you dive into the rates banks are paying on their backbook. Most banks have dozens of accounts that are closed to new business, where rates have slowly been ratcheted down towards zero over time. As rates have risen, banks have changed the rates on different backbook accounts by different amounts – optimising for profitability rather than good customer outcomes. That will have to change in a Consumer Duty world.

I know from conversations that many large banks are hoping that Consumer Duty is a flash in the pan that the FCA will find impossible to enforce. I think they’re wrong about that. We will surely see some firms respond in the spirit of the rules, and start to try and articulate the value they offer more clearly. In time, that will put pressure on the big banks to follow suit – or be sanctioned.

For too long, the way banks make money from current accounts has been opaque. However, many customers have got good value - particularly in a low rate environment - and banks need to be ready to articulate that to customers, and to adjust their offering now that rates are higher.

Consumer Duty challenges banks to be clearer with customers about where they are making their money – and to prove that there is a reasonable relationship between the costs and price of the product. It’s an opportunity to build a more transparent and trustworthy relationship with customers. Those who chose to ignore it should expect mounting pressure from both Parliament, regulators and the media. And of course, we'll be watching.