The crisis isn’t over yet

The Bank of England may have kept interest rates on hold for another month but if we needed any reminders that the financial crisis is far from over, we’ve certainly had them in the last few weeks.

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The UK economy is still in recession, unlike many of its foreign counterparts and the chancellor announced this week that more taxpayers’ money – around £40billion - will be pumped into the banking system to help support Royal Bank of Scotland and Lloyds Banking Group. He also announced that these banking giants are to be broken up and this is going to affect millions of customers.

So what does it all mean for the likes of you and me? Well Kevin Mountford, who is moneysupermarket.com’s head of banking, is with me to explain.

Q1: So Kevin can you just explain first of all what has been announced this week?

Kevin Mountford: I think this is just a continuation. If you think about 12 months there was the formation of super-banks, which was meant to stabilise the banking sector here in the UK on the back of the global economic downturn, and at some stage that situation would need to be revisited for a number of reasons, two things in the main, one just around competition – so would these banks be allowed to continue with the stock holding that they have across key retail products.

And then the second thing is that these are underpinned by substantial amounts of tax payer’s money. So, the government will need to develop an exit strategy that allows us to effectively get our money back. So basically this is where we are now in terms of that journey.

The declaration this week that two of the banks, RBS Group and Lloyds Banking Group will need to sell off a number of their assets to basically get into the situation I’ve just described.

Q2: And this sell-off will affect customers won’t it? Because we are talking about selling off parts of the business – Lloyds is going to sell off Cheltenham and Gloucester, Intelligent Finance. RBS is selling off its insurance group and NatWest branches in Scotland and stuff. So what does that mean for the customer?

KM: It should mean that there are more players and more players should be better products and propositions – that’s the theory behind it – whether it actually translates into that, only time will tell.

And you have outlined these areas of the business that they plan to break up, as is often the case the devil is very much in the detail and this is not going to be an overnight transformation - it’s going to take actually several years before it takes effect. So don’t just think that tomorrow morning we’ll wake up and there will be lots of new brands on the high street.

Q3: Who might buy them?

KM: Well that’s an interesting question and one or two organisations have already declared an interest to go into the world of banking. So the likes of Tesco – they have been very vocal in terms of their business plans and clearly Virgin have got an appetite to go down this route, they w ere one of the organisations that where looking at picking up on the fallout of Northern Rock. Clearly now that they have applied for banking licences there is an opportunity there.

I don’t know the details in terms of whether they would be prepared to wait for the period that we are talking about here. I think the one thing that is clear is the Government don’t want these assets to be taken up by other existing banks, because otherwise you get back to the same situation. So it is meant to spread this across new entrants into the market place.

Q4: So the other banking giants such as HSBC and Barclays, they’re not going to be able to bid, are they?

KM: No, that is the theory behind it. What we are doing here is, or what the Government is doing here is, creating a platform for a strong sale. So what they will do is divorce the assets – the good ones and the not so good ones – so they will create a better case I guess for prospective buyers.

The one thing that we need to consider is that most of us are not only consumers or customers but also taxpayers, so we have go to make sure that there is a right balance between creating an environment that adds competition and not creating basically a fire sale that means these assets are sold off cheaply and we have to carry the burden of that for many years to come wearing our taxpayer hat.

Q5: Obviously you said it’s not going to happen overnight, but if you have a mortgage or a savings account with one of the brands that going to be sold off, what will it mean? Will your terms and conditions change? Will the rate you’re on change?

KM: All I would say is that if you find that you’re being moved to an environment which you’re not happy, you should be given every opportunity to vote with your feet, and whilst all of this is going on my call would be to Government and to regulators to ensure that we create a proper, healthy switching process so that - not only in theory, but in practice – you can easily port your products to a brand which you’d prefer to work with, because at the end of the day nobody should be forced to have a relationship with an organisation that they don’t want to.

Q6: And I guess it could offer new options and new opportunities for consumers, if we’re going to see new brands come into the market, then theoretically if they want to make an impact they’re going to have to offer competitive deals aren’t they?

KM: Yes, they’re going to have to get some cut-throat? I think it’s naïve to think that it’ll all be price-led – we’re in a difficult market environment at the moment – but that doesn’t stop product innovation, maybe improve service – what’s to stop somebody coming onto the high street and saying ‘our branches are going to be open 8 until 8’?

There’s at least some sort of differentiation, and that will be critical. But I’m sure that the organisations that are looking at the opportunity will be considering how best they make their mark within the banking world.

Q7: So just when we thought everything was calming down, it’s all been shaken up again!

KM: It has, and hopefully now – because clearly you’ve talked about the amount of taxpayer money that’s been ploughed into it again – hopefully this is where we turn the corner, because if we continue to throw good money after bad then I’m quite fearful for all of us, so hopefully now we’ll get a bit more of a balanced situation and we can start to think more positively about next year and beyond.

Q8: And just for customers who are worried, it’s just sort of make sure you keep yourselves up to date with where you’re at and what rates you’re being paid I guess?

KM: Yes, but that will be the same whether you’re moving to a new provider or staying with an existing one. It’s a volatile market - you owe it to yourselves to make sure you keep an eye on the products and services that you’re getting as a consumer.

CF: Great, thank you Kevin.

KM: Thank you.

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