Michael Shand (pictured), managing principal at Capco, has addressed the implications of the Bank of England’s recent decision to lower interest rates to 5.0%.
Shand’s comments come as UK banks and building societies face their first significant test of Consumer Duty in a declining interest rate environment.
The reduction in interest rates marks a critical moment for firms as they assess whether they have adequately embedded the principles of Consumer Duty into their operations. Shand highlights the importance of UK banks and building societies ensuring that their responses to the rate cut are aligned with their obligations under Consumer Duty, particularly in terms of delivering good customer outcomes.
Shand notes that the preparations made by firms for Consumer Duty were aimed at ensuring their products and services deliver fair outcomes, particularly regarding price and value. In August 2023, amidst rising interest rates, the Financial Conduct Authority (FCA) required firms to demonstrate that their savings products supported good outcomes for customers.
However, a falling interest rate environment brings new challenges, particularly when considering the impacts on borrowers versus savers.
Shand points out that for borrowers, the focus will be on the speed and extent of rate reductions and how these changes affect different customer groups, including vulnerable customers and those with specific financial products like variable rate mortgages.
For savers, the issue will revolve around how quickly and to what extent rate cuts are passed on, as well as the impact on various customer segments. Shand also raises the question of whether the financial services sector will need to offer new or enhanced support to ensure customers are saving effectively in this environment.
Additionally, Shand emphasizes the need for banks to ensure that all communications regarding rate changes are clear and comprehensible. Banks must consider whether differences in their service channels—such as online-only products versus in-branch services—might result in disproportionate impacts on certain customers.
As UK banks and building societies evaluate their response to interest rate changes, Shand outlines seven key areas that should be prioritized to ensure that Consumer Duty is fully integrated into their operations.
Shand stresses the importance of moving beyond a simple checklist approach to fair value assessments. Firms should thoroughly examine the value provided to customers and whether the benefits justify the costs. He suggests that fair value assessments should become an integral part of product management.
Firms also need to carefully balance the speed and degree to which they pass on rate changes, ensuring that these actions meet customer expectations. Shand advises that scenario planning should be conducted in advance to facilitate timely decision-making that considers the balance between the price paid and benefits received.
According to Shand, it is also essential for firms to demonstrate that their decisions are data-driven. He notes that the FCA is increasingly adopting a data-driven approach in its own decisions, and firms should follow suit by using a mix of internal indicators and external data, rather than relying solely on market price comparisons and benchmarks.
Clear and transparent communication with customers is crucial, particularly when rates are changing. Shand suggests that firms should develop a range of communication options in advance to ensure that changes are communicated effectively and promptly across multiple channels.
Shand highlights the need for banks to assess the impact of rate changes on vulnerable customers comprehensively. He advises that firms should consider what additional support or guidance may be required and ensure that staff are adequately trained to assist customers, especially those who may hold multiple products and be both savers and borrowers.
Shand calls for firms to provide clear oversight of customer outcomes across all areas. He recommends that firms leverage data insights from initial Consumer Duty work, including fair value assessments and target market maps, to address these challenges proactively.
Lastly, Shand notes the importance of oversight across the supply chain, particularly where third parties are involved as manufacturers and distributors. He advises that firms ensure they have the necessary information to assess whether rate changes deliver fair value throughout the supply chain and demonstrate how value is shared.
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