Fixing fees in a free market

MYSTERIES of the free market (part 1): Newton Investment Management, a financial company, is about to relaunch an income-generating unit trust. It is traditional with such launches that, for a limited period, the company gives financial advisers the right to rebate to clients as much of the 5 to 6 per cent initial charge as they wish. Some brokers, including a firm called Chelsea Financial Services, like to give almost all of that amount back to their clients. Thus the firm gains new business and the investor gets a hefty discount. This, we are often told, is what a free market is allabout.

Except that, in this case, according to Money Marketing, a financial weekly, cut-price Chelsea is being told it will not be allowed to offer more than a 3 per cent discount.

Why? Because, otherwise, another firm, Hargreaves Lansdown, will not spend the funds required to send details of the relaunch to its 275,000 clients.

Given a choice between this huge mailing list and Chelsea's lesser efforts on its behalf, Newton has opted for the one in which investors get hammered. It is somewhat puzzling that Newton defends its stance on the grounds that "this is what the free market is all about".

Which is fair enough. Presumably then, Newton won't mind if readers of this story adopt another yet interpretation of the free market and boycott the company's products until it changes its mind.

MYSTERIES of the free market (part 2): As explained elsewhere on this page, building societies are lifting their bottom line by putting an extra charge on borrowers' monthly bills.

Asking buyers to pay the lenders' indemnity premiums is a disgrace. Even worse is the refusal of societies to give customers a choice of insurers to go to. Nor are buyers told of the hefty 30 per cent commission earned by lenders.

Despite the fact that they are theoretically controlled by borrowers, societies seem happy to profit from this secretive practice. Presumably this is the free market speaking again.

Later this year, the Consumers' Association plans a special investigation into this scandal. It will then present its findings to MPs for action. The CA advises anyone selling a home to demand a refund of the premium, because it is no longer needed by the lender.

Borrowers should always check the total cost of a mortgage before they take the plunge. Headline rates do not always reflect the true cost of buying a house. Ask any building society.

As if home buyers are not hit hard enough already, last week's news of another base rate increase is likely to heap more pain on millions of already-sore shoulders.

Most of the big lenders' insist that they are not planning to increase their mortgage rates in the foreseeable future and that they will only do so if they are forced to by "competitive" pressures.

I desperately want to believe all this, as does anyone who has been on the mortgage roller-coaster for the past few years.

The problem with the argument, as more than one cynic pointed out this weekend, is that we have heard similar sentiments expressed before. Was it not what lenders were telling us at Christmas, a few weeks before payments were forced up again?

Lenders argue that there is far less pressure to increase interest rates than the last time. Savings rates, which impact on mortgages, will not have to rise because there is less net outflow from societies' coffers.

Presumably, the £5bn which the Government intends to raise from its rail and power privatisations this year does not count.

My advice, then, to mortgage holders: forget that holiday in the Bahamas and batten down the hatches. Greece can be so much nicer in the summer.