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Clare Francis: The events of last week were extraordinary and as a result British banking looks set to change forever. The fact that one of the UK's largest banks, Halifax Bank of Scotland, had to be rescued by Lloyds TSB, and the speed with which the rescue package was agreed, was quite incredible.
Perhaps what makes the Lloyds/HBOS merger so surprising is that it was necessitated by panic, and not because of fundamental problems with HBOS' business model. But as economies around the world face their biggest challenge since the 1929 crash, investor behaviour is becoming increasingly irrational as fear grips the markets.
HBOS is clearly the most high profile victim of this behaviour here in the UK, but just what will its merger with Lloyds TSB mean for customers? Kevin Mountford, head of banking and mortgages at moneysupermarket.com is with me today to evaluate the impact this could have on the market.
Q1: So Kevin, just how big a deal is this merger - what will the ramifications be?
Kevin Mountford: Well I guess, gosh, the events of the last week have been absolutely crazy. In all the years I have worked in financial services I have never known anything like it, and I think although events have happened around the globe and particularly in the US, the fact that this is very much on our home soil is going to have a big impact on the consumers, and bear in mind this combined bank is going to have something like 30% of the mortgage and the savings market so there is no avoiding the fact that it is going to pretty much impact to variant degrees on every house hold in the UK.
Q2: It's been termed the first "superbank" hasn't it?
Kevin Mountford: Yes it has, I know that I very much from the fact that it has got a real retail presence in the high street, through call centres, through online proposition etc. this is a huge organisation and only time will tell in terms of the real impact but I guess even from day one people will start to be looking at the situation very, very closely.
Q3: And do you think customers, Lloyds and HBOS existing customers are going to be better or worse off because of this?
Kevin Mountford: I think short term there is a number of factors, not just relating to HBOS and Lloyds but also again the global economic situation and that certainly hasn't gone away and I think the confidence factor is still a real challenge. I think short-term most customers will find very little difference, although both organisations have gone through mergers and acquisitions before and I guess can mobilise quite quickly.
In reality it's going to take a period of time before we see any real changes. Medium/long term I am fearful that in the UK we are going to see a degree of consolidation and that means less choice and I think one of the things we have really benefited from is quite a wide range of competition and we have been very much in a price led market, and bear in mind, when HBOS was born (Halifax Bank of Scotland) they set about challenging the big four banks and they did that by offering price-led, competitive and fairly transparent products. So effectively, by definition people have benefited from their presence - the questions is how will it continue?
Q4: And Alliance and Leicester, they have also been quite aggressively pricing but obviously they are going to be taken over from Santander which owns Abbey so there is two major players that have been really fighting to acquire new customers that are being subsumed into bigger organisations aren't they, so could rates get less competitive do you think?
Kevin Mountford: Well, again they are two perfect examples. They are fairly new on the block compared to some of the big four or five banks and they have very much driven their campaign around price led, innovative, creative products, and as you rightly say if Santander own A&L and Abbey they are clearly not going to go head to head anymore and the big question is 'who then are they looking to compete?' once they have got the combined benefits of both those brands.
Q5: One of the things with the merger between Lloyds TSB and HBOS is obviously under normal circumstances it wouldn't be allowed under competition rules, but the government was keen for the agreement to happen because it didn't want to have another Northern Rock. It didn't want to see another run on a bank because savers worried about how safe their money was. What protection do you have? Can you just explain the compensation scheme and what happens if a bank where to go bust?
Kevin Mountford: Yeah, I think the first thing to point out is that generally there is two reasons that the banks come under pressure, and one is that fundamentally the business model is flawed or the second thing is, its all about confidence - confidence in the city, share holders and consumers, and I think as far as HBOS is concerned its very much the latter, so the government were keen to ensure that they help people to over come those concerns by bringing this big bank together.
At the moment everybody seems to be focusing on 'Is my saving safe?' for instance and people are starting to talk about the financial services compensation scheme and this magical £35,000. I was talking to a provider and they had a withdrawal of something like a £1,000,000 on somebodies account and that person left £35,000 in there because psychologically they thought 'this is how far I am protected or not'.
So going back to your point we have a financial services scheme here in the UK and that protects cash savers up to £35,000 - that is the basic headline message. You do need to look into the details because there are one or two nuances around the terms and conditions, there is three in particular, one is single registration, so if a provider at group level as a single registration such as HBOS and then the sub-brands under that you still only get the £35,000 coverage -
Clare Francis: That's a registration with the Financial Services Authority?
Kevin Mountford: - it is, yes. And the second thing is the netting off clause and that is when you have your mortgage and your savings with the same provider. If that bank failed it would take your savings to offset against your mortgage and only if there was a surplus amount would you get any back.
And then the third thing is the European passport element which pretty much says that certain European banks if they are not fully registered through the UK scheme your first call of action is on the bank of origin, so for instance you have got Landsbanki - which is the Icesave brand - so you would have to go to Iceland for your first refund and then whatever the residual amount you go to the UK scheme.
Q6: Are we going to have less protection following the merger because obviously if you have got an account with Lloyds and an account with Halifax you can have £35,000 in each and so £70,000 totally guaranteed, is that still going to be the case post merger or are we going to see them all under the same single registration with the FSA so effectively you have got half the protection?
Kevin Mountford: I think there is a number of things that will transpire over the coming weeks and months but the message at this stage it the intent to have single registration for Halifax and for Lloyds TSB, which bear in mind the earlier point about consumer confidence the last thing that they want to do is create massive withdrawals of this combined "superbank".
And if you suddenly said we are having single registration, by definition the percentage of the market they have got people will withdraw money so I think it is likely that they will have single registration. The other thing to think about, if you have a joint account the level of cover is doubled, so Mr and Mrs have got £70,000 worth of cover.
Clare Francis: Interesting times, thank you Kevin.
Kevin Mountford: Ok, thank you.
