Money Insider: Will reforms really shake up the high street?
Saturday 17 September 2011
On Monday the Independent Commission on Banking (ICB), led by Sir John Vickers, published its 360-page report recommending some radical changes to the way our banks are structured.
Four years on from the run on Northern Rock, the far reaching proposals include separating the retail side of our banks from the more risky investment parts of the business and a recommendation that higher levels of cash are set aside to reduce the impact of any future banking crisis.
This is a mammoth and complex undertaking for the banks, due to be implemented by 2019 and at a cost estimated to be between £4bn and £7bn. As far as the customer is concerned, the main changes are around greater transparency, more competition in our banking industry and measures to improve the process of switching your bank account.
There is no doubt that we don't want a re-run of the banking crisis and further taxpayer bailouts, but there are rumblings within the industry that the Vickers proposals could lead to higher borrowing costs for personal and business customers.
The report also recommends that accounts are transferred between banks within seven working days and that a new redirection service be set up by 2013.
The redirection service is aimed at overcoming perceived customer concern that direct debit and standing order payments go astray during the transfer process, with the new system automatically redirecting payments to the new account.
The ICB says the new rules will make customers more likely to switch providers and, in doing so, generate more competition between our banks. However the reason people don't switch isn't primarily down to concerns regarding the switching process.
A survey of Moneynet readers earlier this year revealed that 37 per cent of customers are happy with their current bank while 34 per cent said they didn't see the point in switching as they felt all banks were much the same – and this is a situation that the Vickers report does not seem to grasp.
Only 29 per cent of people said they did not switch because they were worried that things would go wrong during the transfer process.
When the new redirection service is eventually in situ, we may see a little more activity in switching banks, but the task of choosing the right current account remains nigh on impossible for some consumers.
When it comes to authorised overdrafts, some banks charge interest on the amount you are overdrawn while others charge a daily fee, some capped at 10 days per month and others unlimited, while to muddy the waters even further, Lloyds TSB charges both interest and a monthly fee.
It depends on how much you go overdrawn and how often you're in the red each month as to which account is most suitable, but unless you have an hour or so to waste with a calculator to crunch the numbers, you won't know which is the right option for you.
If the industry really wants people to shop around for their banking then consumers need to have a clear understanding of credit interest or debit interest charges with the ability to simply compare one bank against another. At the moment there is too much focus on driving customers towards packaged accounts with a monthly fee or short-term promotional headline rates, rather than a decent long-term deal.
While the ICB proposals on ring fencing may prevent another bail out scenario, who is going to bear the cost of this exercise is yet to be seen. But with new legislation required to implement some of the recommendations, don't expect to see big changes on your high street anytime soon.
Inflation still a thorn in the side for savers
The latest inflation figures for August made more gloomy reading for savers. Just a week after National Savings and Investments withdrew its index-linked savings products from sale, the CPI measure of inflation increased again and now sits at 4.5 per cent. This means a basic rate taxpayer needs to earn a gross interest rate of 5.625 per cent to protect the value of their nest egg – something that is just not possible in the current market.
With the base rate stuck fast at 0.5 per cent for 30 consecutive months and the Government showing no signs of taking action to bring inflation anywhere near its almost laughable 2 per cent target, our savers continue to be ignored while those with variable rate mortgages rub their hands with glee.
It's time the Government recognised the plight of people who are reliant on their savings to maintain a basic standard of living. The inflation linked increase in the ISA allowance, due next April, will prove little comfort, and with stock market volatility currently scaring the pants off many investors perhaps it is time for a substantial increase in the annual tax free limit for cash savers.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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