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CF: It's a year since our TV screens and newspapers were dominated by scenes of panicked savers queuing up outside branches of Northern Rock desperate to pull their money out. And what we've seen since then has been quite extraordinary.
World economies are still grappling with a financial crisis the likes of which have never been seen before, and the knock-on effect for consumers is that bills are rising left, right and centre, house prices are falling and recession is becoming a bigger risk every day. But ironically, the main beneficiaries of the credit crunch are savers.
So, one year on from the run on Northern Rock, what's happening in the savings market? Well, Kevin Mountford, who's head of savings here at moneysupermarket.com, is here to explain.
Q1: So Kevin, it's been quite a momentous year for the financial markets but what's changed for savers?
KM: Well I guess it's been a good year for savers because effectively the liquidity issues the banks have faced, either the lack of confidence in trading between themselves or the inability to trade because it's become too expensive, means that the focus has shifted greatly towards consumers - basically the banks now need retail inflow and subsequently the savings market has benefited from this greatly over the last 12 months.
Q2: So how much better are the best savings rates now than they were this time a year ago?
KM: Well I guess in terms of a barometer of rates you need to be looking at bank base rate (BBR), so to put that into perspective a year ago the BBR has 5.75%, and its now down to 5%. I think typically the easy access about a year ago you were getting just over half a percent above that base rate - that's actually up to 1.5% now, so you've got over 6.5% is the market-leading easy access account, and even more than that if you're prepared to lock your money away for a short period of time.
Q3: I was going to say that because the rate on the best fixed rate deals are higher than those on easy access - why is that the case?
KM: There's a combination of factors. I think recently we saw a hike in fixed rate bond customer pricing, because the market swap rates were as such that it was actually cheaper than easy access. We then saw a steady decline across the board, because these swap rates started to soften a little. Lo and behold however, ICICI, which is an Indian bank, came out with a 7.2% offer, so I think that caught the market cold and I guess this is the other factor to consider.
If the banks attract substantial amounts of easy access money, it basically means that this money can leave as quickly as it comes in. So to balance this risk they then look to run a range of bonds, so if a customer takes out a one year bond by and large that money will stick for one year, so it just balances the risk for the banks, because clearly as we've said earlier, they don't want a mass exodus of retail savings that they've actually fought hard to acquire in the first instance.
Q4: With regards to rates it's obviously a great time to be a saver but I think one of the other big changes that we've seen over the last 12 months attitude to risk. Obviously before the Northern Rock crisis no-one would have ever assumed that a British bank could nearly collapse. Consequently there's a lot of nervousness about and people are just concerned about where they put their money, and what protection they've got. What advice would you give to somebody who's got some money that they're looking to invest at the moment?
KM: Yeah I mean I guess it's interesting as you rightly say, a year ago everybody was warned about not putting money under the mattress and you've got to put it into a bank, and generally people never ever had concerns that that money would be at risk. The Northern Rock crisis, and I guess subsequent scares in the markets since mean that that attitude has changed.
I mean, just anecdotally I get my father-in-law knocking on the door on a Sunday morning saying 'I've got my money with this provider', and 'is it safe?' In reality there's still minimal risk that we'd ever see a bank disappear, but that doesn't suggest that people are not concerned - and rightly so, they've put their hard-earned cash away!
I think that the best advice that I would give is that we do have a recognised financial services compensation scheme, and at the moment that protects you up to £35,000, so what I would generally say is that if you are in that fortunate position that you've got more than that, just spread the risk by putting pots of money with different providers.
Q5: What about foreign banks? You mentioned your father-in-law - my neighbour came up to me the other day and he is concerned about investing in some of the leading rates because they're offered by overseas institutions. Do you get the same protection from them?
KM: There are a number of anomalies under the compensation scheme and I think that's something that needs to be addressed going forward, but basically all of the savings providers that operate in the UK are regulated by the FSA, so there's some comfort from there. However the European banks there is a clause in the compensation scheme that offers what they call a 'European Passport' element to it, and that means that if you are not fully registered in the FSA in terms of the scheme, then your first point of call is to the country of origin.
So for instance if it was an Icelandic operator that wasn't fully protected under the scheme, you as the consumer would first of all go to Iceland, and if there's any residual amount of the £35,000 you would then claim under the UK scheme. But for world-wide, i.e. non-European then you find you're covered up to £35,000.
I think where it gets a little bit more difficult is there is also an element that's a single registration, so you could be a holding company with one registration, but you have got several brands that operate under that one licence -
Q6: A bit like HBOS?
KM: - HBOS perfect example because you have got Halifax, Bank of Scotland, Birmingham Midshires and then some of their what we call 'white-label' solutions, the likes of the AA and SAGA. So effectively again you need to look at that when you intend to spread your risk.
Q7: Because you're only protected for the first £35,000 aren't you?
KM: On the one occasion, yes.
Q8: And what does the future hold do you think? We've heard this week that Cheshire and Derbyshire building societies are merging with Nationwide, and Santander looking to take over Alliance & Leicester - do you expect more consolidation in the savings market and what will it mean for rates?
KM: I think again without getting too complicated around the financial dynamics of the market, the economy is still struggling, and that's not just limited to the UK, it's on a global perspective.
Share prices have reduced; now that in itself means that some of the banks will be fair game if the overseas banks wanted to get a foothold in the UK. You mentioned Santander - clearly they acquired Abbey business, they've been looking at A&L for some time and now that the share prices are depressed it becomes I guess a good deal for them, and there could well be more than that.
You mentioned the building societies sector - for me there're a number of small building societies that are really going to struggle because they're so reliant on a limited branch network. Maybe in the past they would have used some tactical best buy activity to give them a broader reach, but that becomes expensive. So I think there will be a period of consolidation.
I think in terms of the future beyond this, the economists reckon that the inflation should peak as we move into quarter 4. That then should give the MPC, the Monetary Policy Committee, the opportunity to look at rate reductions so there is a chance that we may get a quarter percent reduction.
Q9: Which could mean that savings rates come down?
KM: I mean I guess that's the risk but I think the environment we have now means that the banks, building societies etc will continue to focus on retail savings and that the rates for customers should stay strong.
On top of that I think we're going to see increased competition - as I say this isn't unique to the UK and it wouldn't surprise me if we saw several more new brands operating in the savings market. Now whether that's UK brands that are widening their products set or whether it's actually overseas banks again coming in to what is a very vibrant UK market. So I think there will be more competition from there.
I think one of the big issues I guess is for the savings market per se is the fact that there's a lot of intent from consumers to save, but with the added pressure of inflation everything is costing us more. The big question is do they have the means to save, and only time will tell.
Q10: So it's more important than ever to ensure that the savings you do have are earning the highest possible rate?
KM: Yes exactly, I mean we are quite complacent when it comes to financial services but I think the important consideration is 'are you getting value for money for those hard-earned savings?'
CF: Thanks Kevin.
KM: You're welcome.