A 14-point action plan to make sure banks and building societies are passing on interest rate rises appropriately to savers has been set out by the City regulator.

Firms offering the lowest savings rates will be required to justify by the end of August how those rates offer fair value – and the Financial Conduct Authority (FCA) said it will take action if they are unable to do so.

The regulator wants to make sure savings providers are passing on rate increases and that they are communicating with customers much more effectively and offering them better deals.

It will use the new consumer duty on financial firms, which came into force on Monday, to help ensure savings providers are offering fair value.

The Bank of England base rate is currently 5%, following a string of increases, and there are expectations that it could rise again on Thursday.

However, there have been concerns that providers have been raising borrowing costs at a much faster pace than savings rates have increased.

According to figures released by Moneyfactscompare.co.uk on Monday, the average two-year fixed homeowner mortgage rate on the market is 6.81%, while the average easy access savings rate is 2.78% and the typical one-year fixed savings account has a rate of 5.19%.

The FCA’s plan follows a review of the cash savings market and a meeting held with banks in early July.

The regulator found that, while interest rates on savings accounts have been rising, this has been happening more slowly for easy access accounts.

It said that nine of the biggest savings providers, on average, only passed through 28% of the base rate rise to their easy access deposit accounts between January 2022 and May 2023.

Notice and fixed-term savings accounts have seen greater pass-through of rate rises, with the nine firms passing through 51% over the same period.

There has also been significant variation between firms, with smaller providers often offering higher interest rates on average than their bigger competitors, according to the FCA.

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

The far-reaching consumer duty on financial firms came into force on Monday, requiring them to put customers at the heart of what they do and setting higher and clearer standards for them to follow.

Companies offering the lowest savings rates will be required to justify by the end of August how those rates offer fair value, according to the duty.

Firms will also need to measure the effectiveness of how they communicate with customers.

Together with the Information Commissioner’s Office (ICO), the FCA recently clarified how savings providers could inform their customers about the best available rates, even where they have opted out of marketing.

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 change, 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.”

It is clear the pace and scale at which rates are passed on to customers needs to be improved, so it's good to see the regulator clamping down on firms that continue to short change their customers

Harriett Baldwin, chairwoman of the Treasury Committee, said: “The committee has been pushing for progress on rates for savers all year and this action by the FCA represents more progress. Consumers should shop around for the best rates but loyal savers should not be penalised.”

Rocio Concha, Which? director of policy and advocacy, said: “Some high street banks have been offering meagre rates to customers for a long time, and it is clear the pace and scale at which rates are passed on to customers needs to be improved, so it’s good to see the regulator clamping down on firms that continue to short change their customers.

“The FCA expects these changes to mean fewer low savings rates on offer, and that banks will be better at letting customers know of the availability of better rates. In the midst of an unrelenting cost of living crisis, it’s crucial that those who are able to put money into savings accounts receive better returns.

“Which? expects to see the regulator taking tough action against any firms that fall short of the new requirements.”

The biggest savings providers have voluntarily committed to increase the efficiency of switching between cash Isas, explore the potential for “open banking” technology to make savings work harder for consumers, and work with the FCA to develop a savings dashboard which gauges consumer activity in the savings market.

The measures support the FCA’s strategy to reduce and prevent serious harm, raise standards and promote competition. The regulator said it will continue to monitor the market and will take further action if it does not see significant progress by the end of 2023.

As part of its action plan, the FCA said it will:

1. Require firms offering the lowest rates to provide their fair value assessments under the consumer duty by August 31 2023 and take robust action by the end of 2023 against those who cannot demonstrate fair value.

2. Review the timing of providers’ savings rate changes each time there is a base rate change.

3. Publish an analysis every six months of companies’ 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 does not continue to close.

5. Review providers’ performance on cash Isa to cash Isa switching.

6. Carry out further analysis into the contribution of cash savings to firms’ profitability.

7. Review the effectiveness of companies’ engagement with customers by the end of March 2024 and take action if they have not effectively delivered the outcomes the FCA has set out.

8. Work with others, including the Money and Pensions Service (MaPS), to identify what more can be done to support consumers to save regularly, strengthening their financial resilience.

The FCA also expects firms to:

9. From Monday July 31, use their fair-value assessments of on-sale savings products to assure themselves and the FCA, where needed, that these represent fair value for customers.

10. Accelerate their fair-value assessments for off-sale accounts ahead of the July 2024 consumer duty deadline for off-sale accounts.

11. Take action to prompt their customers in lower-paying savings accounts or non-interest bearing accounts to consider alternatives.

12. Closely monitor the effectiveness of customer communications, with larger firms providing the FCA with an evaluation by the end of 2023 and any follow-up action they are taking.

13. 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 communications campaign.

14. Consider how they can support their customers to access the free advice available from MoneyHelper.