The drop in interest rates will prove one of the first “substantive tests” of product pricing and customer fair value since the introduction of the consumer duty a year ago, says Capco.
On Thursday, the Bank of England lowered the interest rate 0.25 percentage points to 5%, marking the first drop since March 2020.
Capco said banks must now start planning how they can stay in line with their consumer duty requirements after implementing changes in an environment of rising interest rates.
Michael Shand, managing principal at Capco, said: “The interest rate reduction to 5% represents the first big public test of the Consumer Duty in the context of falling rates, and the extent to which firms have embedded the concept of good outcomes into their policy, practice and culture.
“For UK banks and building societies, now is the time to consider how they respond in a way that ensures they stick to their obligations under the Duty.”
Shand said a falling rates environment poses a different set of questions for firms in relation to borrowers versus savers. For borrowers, that could mean the impact of the speed and scale of rate reductions, including different customer cohorts, such as vulnerable customers or those with specific financial products like variable rate mortgages.
For savers, questions will arise surrounding the speed and scale at which rate cuts will be passed on to savers, as well as the impact of these changes on different customer segments.
Shand added: “In addition, banks must consider how to ensure all communications around rate cuts are clear and well understood, as well as whether there are any differences in their channel offerings which mean changes will disproportionally impact certain customers or certain products such as online-only customers/products vs in-branch services and products.”
Capco said there are seven areas that banks and buildings societies must now consider. These include genuinely taking the time to examine the value customers receive, and whether benefits are commensurate with what they pay; carefully considering the speed and degree to which they pass on rate changes to customers; ensuring that their decisions are data-driven rather than relying on market price comparisons and benchmarks; and ensuring that customer communications are clear and transparent as well as frequent and easy to understand.
In addition, the technology and management consultancy said banks must ensure that impacts on vulnerable customers are clearly and fully assessed, both for savers and borrowers as rates decline, and provide clear oversight of well considered outcomes for customers across the board.
Finally, banks must ensure they have the information and insights to assess that rate changes deliver fair value across the supply chain and can show how value is shared, said Capco.
