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Clare Francis: We've had further confirmation that the financial crisis is far from over. The Government this weeks announced another bailout package to help the banks and try and restore confidence in the system, but it puts hundreds of billions of taxpayers money at risk, and that's in addition to the near on £500 billion that was put at risk in the last bailout package last October. So what does all this mean for us the consumer, for savings rates, for mortgage rates? Well Kevin Mountford, who is head of banking at moneysupermarket.com, is with me to discuss.
Q1: So Kevin, what does this latest bailout package mean?
Kevin Mountford: Well, I guess we've seen a series of measures undertaken towards the back end of last year, and I guess as we move into the new year, it's evident that its not worked, and there's obviously even more problems in terms of addressing the global economic situation. The bottom line is the banks are not doing what the Government wanted them to do, and that's to get back to some normality in transacting their business. So that means the savings coming in, and obviously the loans in various forms going out to customers, both consumers and in business, and that's not happened.
I think the other thing that's evident is there's possibly more bad news in terms of the level of bad debt that the banks have got, and the Governments saying 'guys, you've got to come clean', and a subsequent consequence of that then clearly there's additional measures that are coming into play.
Q2: Do you think it's going to work though, because obviously the new insurance scheme is hopefully going to mean that the banks no longer have to worry about building up their own reserves to cover bad debts, because the Government's said 'it's okay, we'll pay for insurance, and we'll cover it, and therefore you can start lending this money'. Is it as easy as that?
KM: On the face of it, it's quite scary because we are all, I guess, paying a part for this, as taxpayers, and subsequently you're saying 'well hang on, there's our money being used now to underpin banks which, if you're being quite cynical about it, you could say they've clearly been mismanaged and subsequently have got to where they have. I think the problem is we don't really have any alternatives, and I don't know how the detail will work with the insurance, but lets hope that in typical insurance terms, the bigger the risk and the bigger the extent of mismanagement by the banks, the higher the premiums and that's the way that we'll offset it.
You would hate to think that this was just a carte blanche decision coming from Government to say 'guys, carry on doing what you've always been doing, but this time we'll bail you out'. I don't think it'll be that - I think it'll be a sensible approach to it. The question is then, how will the policies around lending actually pan out, so does that mean there is only on mortgages a certain loan-to-value, on businesses only a certain amount of lending against balance sheets - I don't know.
Q3: Because one of the ways the banks are going to be able to potentially pay for this insurance is through swapping shares, so the Government increases its stake in the holdings of the banks. The Government already owns about 70% of Royal Bank of Scotland (RBS), Northern Rock is nationalised - RBS could be nationalised within days - 43% of the newly formed Lloyds group, which is the Lloyds TSB / HBoS group. If Barclays and HSBC, which don't currently have any Government stakes, if they choose to swap shares what impact is a sort of nationalised banking system going to have on consumers with regard to competition and rates?
KM: It's not just these shores, I mean clearly Anglo-Irish has recently been nationalised by the Irish Government and that impacts on UK savers. I feel that just consolidation on the market per se isn't great, that's a consequence of the situation we're in and it meant there was very little alternative to it. However, less brands, less players - it's got to mean less competition and the other thing is that the business case around some of these will be very much dependant on driving costs out. So if they're driving costs out, the likelihood is that will be operational costs - customer services basically - so the one thing we need to make sure is that we as customers don't suffer as a consequence of that.
Q4: Do you think with this new bailout, if it's successful and does what the Government hopes it will do, it should mean that mortgage rates come down and it's easier to get a mortgage, car finances or personal loans than it has been in the last 6-12 months? So borrowers stand to potentially benefit, but as you're saying savers could lose out because of reduced competition, we've also got falling interest rates and possible further interest rate cuts to come. What are you seeing in the savings market at the moment following the recent rate cut and the latest financial crisis and how do you think it's going to pan out?
KM: As far as the impact on savers, we have been forgotten in many respects - [there are] seven times more savers than borrowers, and all the political agendas been around the borrowing.
The tides started to turn now, and I think it very much is getting on that political agenda - clearly the Conservatives are coming out with their views - and we've seen to forgotten the fact that the rhetoric coming from governments over recent years is that we ourselves need to put money aside for our future, medium / long-term, and yet where are the tools and support to help us to do this? So I think in a low base rate environment there's a danger that people will just turn off, because rates don't seem to be attractive enough.
That said, there is still some clear blue water between the banks rates and not only the lowest rates, but even the average rates that we're seeing at the moment. Some analysis we undertook says that the average rate on savings is actually less than bank base rate at the moment.
Q5: And presumably that could fall further in the coming weeks as providers react?
KM: It could do, so what I'm looking for I think as a minimum is a significant increase in Isa allowances - at the moment for cash it's £3,600, lets see what that means by getting it to £10,000 - or I would certainly say that at some stage we ought to take away tax on interest earnings anyway.
But going back to my earlier point, there's non-Isa fixed rate bonds still paying over 4.5% - you've got the likes of ICICI and Anglo-Irish that are very prominent there - and even in the easy access there's quite a number of providers paying 3 and three-quarters of a percent.
Q6: Because obviously you mentioned two providers there, ICICI and Anglo-Irish. Obviously Anglo-Irish was nationalised last week, ICICI we interviewed them just before Christmas and they've sort of reassured savers that you've got exactly the same level of protection because they're a UK registered bank, even though their parent company is Indian, but there is still this sort of concern isn't there amongst savers, would you feel safe putting your money with them?
KM: If I had some! I think the Anglo-Irish situation, they're 100% guaranteed by the Irish Government, so as long as you think that the Irish Government are going to keep their head above water then you're fine. As far as ICICI, I think last year proved one thing, and that's the Financial Services Compensation Scheme works. It paid out as it was meant to pay out, so as long as you keep within the £50,000 limits then you should be okay.
Q7: So what would you say are your key messages are to savers at the moment?
KM: I would say just because there's falling rates, don't get complacent - I think there's need now to be more vigilant than ever. You've got to be shopping around. You've possibly got to look at a mixed portfolio, so for people who've got a bit more money in their pocket, and want to get on that savings ladder for the first time, look at regular savers products. If you can afford to lock some money away, look at fixed term bonds, but maybe no more than a year, because these things will go around in cycles, and I would also look at taking up an Isa allowance now as opposed to waiting until maybe March.
CF: Thank you Kevin.
KM: You're welcome.