High Street meltdown

The merger of two of Britain's biggest banks would normally be carefully scrutinised by competition authorities, but this is no ordinary week for the financial services industry.

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Investors, scared by the downfall of world-famous American investment bank Lehman Brothers, the near collapse of insurance giant AIG and the emergency takeover of Merrill Lynch, had been ditching HBOS shares in their droves, inducing the bank into merger talks with high street rival Lloyds TSB.

The merger has created a mammoth bank worth £30 billion and will significantly reduce competition in the UK banking sector.

Whilst this shotgun marriage of HBOS and Lloyds TSB will be waived through by the competition authorities, once the dust has settled we will have lost some valuable choice and competition on the high street and consumers will be the poorer for it. With the Santander takeover of A&L now confirmed and building societies merging, we are seeing a large reduction of diversity – the financial equivalent of the rise of Starbucks. Even when the brands remain, the inevitable merging of back office systems means that products will become increasingly homogenous and underwriting criteria will become centrally controlled.

HBOS’s weak share price bore no relation to the undoubted strength of the business. It could have survived and prospered independently and in the medium to long term. This would have been the better option for consumers and the 40,000 people who may now lose their jobs.

What will this mean for HBOS/Lloyds customers?
Savings experts argue that there will be very little impact on the market as a whole – although some Lloyds and HBOS accounts are likely to merge.

It is the likes of A&L, Abbey, Kaupthing Edge, ICICI, HSBC and Barclays that have market-leading products in current accounts, bonds, easy access accounts or Isas.

If you are looking for a new savings deal, the market-leading fixed rate is offered by the ICICI Hisave Fixed Rate Account at 7.20% for one-year, and there are a number of other competitive rates on the market in excess of 7% from the likes of Kaupthing Edge (7.15%), United Trust Bank (7.12%), Firstsave First Bank of Nigeria (7.10%), Icesave (7.06%) and Anglo Irish Bank (7.05%).

If you don’t wish to lock your money away then the leading rate is offered by the Alliance & Leicester esaver at 6.56%, although this account is only suited to disciplined savers as penalty-free withdrawals are only permitted during the month of July.

For more flexibility with no withdrawal penalties, the Kaupthing Edge Instant Savings Account has a rate of 6.55%, and a guarantee to be at least 0.30 percentage points above Bank rate until February 1, 2012.

You can compare more rates, using our savings account comparison tool.

What about the collapse of Lehman Brothers? How will that affect me?
Lehman Brothers was felled by about $60billion in bad debts and suffered the biggest corporate bankruptcy since Worldcom collapsed in 2002, leaving 5,000 staff in Britain alone to clear their desks – the country’s biggest single job loss since the fall of Rover in 2002.

Other than job losses, however, this will affect very few UK consumers directly. It is the indirect effects that are proving impossible to ignore today.

The majority of UK customers have had no direct exposure to Lehman Brothers, although it did have a handful of mortgage customers in the UK through its two subsidiaries SPML and Preferred. These customers should continue to pay their loans as normal as they will not be immediately affected.

However, most of our banks and pension funds have dealings with Lehman, or with firms such as hedge funds that traded with the company. Unwinding the deals associated with the institution could take months, making it difficult for banks to free up the money locked in those deals.

What will the wider effects be?
Financial turmoil such as that seen this week is bound to have a detrimental effect on the housing market, which is already reeling from record-breaking price falls. Lenders had started to relax some of their criteria by reducing rates on some mortgage deals, albeit generally only for those with large deposits, but now even this seems likely to be put on hold.

Savills, the estate agent, is forecasting that prices will fall by 15% before the end of the year, which seems optimistic given this week‘s events. Click here to watch our latest video blog: Clare Francis interviews Fionnuala Earley, Chief Economist at Nationwide.

Should the Bank of England respond by cutting interest rates, tracker and discount mortgages will hold appeal such as the Principality Building Society two-year flexible discount at the low rate of 5.49% and the HSBC two-year discount at 5.39% - both of these deals carry a fee of £999.

If you prefer the security of a fixed rate, now is a good time to lock your mortgage payments as the leading deals actually have slightly better rates than those of the leading tracker and discount offers. For loans up to a value of 75%, Yorkshire Building Society has a two-year fix at 5.29% with a £975 fee, while First Direct offers a 4.99% rate on its two-year fix for loans up to 80%, albeit the fee is higher at £1,998.

For those with smaller deposits HSBC has a number of competitive deals up to 90% and for fixes, Yorkshire Building Society has a low rate for loans up to 90% at 5.89% with a fee of £495.

Either way, it makes sense to act quickly and move to a more competitive deal while the rates are available.

Have your say: How do you rate your provider? Give feedback on your experience with your savings, loan, credit card or debt solutions provider and help others decide which provider to choose

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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