Jeff Salway: ‘Loyalty to unpopular banks lives on’

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THERE was an expectation as the financial crisis unfolded that growing hostility towards the banks would drive their customers into the arms of providers less tainted by scandal and failure.

It didn’t. Because it turns out that ripping off customers and generally dragging the industry’s reputation through the mud, in some cases at the taxpayer’s expense, just isn’t enough. Our loyalty to brands we apparently distrust and dislike remains intact.

It’s estimated that current account switching still ranges between 3 and 8 per cent a year even after a series of scandals, from PPI to Libor, has taken anti-bank sentiment to new levels. The big five banks have an 85 per cent share of the current account market, which, thanks to consolidation, is higher than five years ago.

In 12 months’ time we’ll have a much better idea as to what it’ll take for more people to change their bank, however, because of two developments in particular.

The first addresses what some people believe is the main barrier to greater switching – a perception that it’s too much hassle. A seven-day transfer guarantee coming into force in September is aimed at improving confidence in the switching system and encouraging more people to shop around.

Another common perception is that they’re all the same. That’s nonsense now and will be even more so following the imminent entry into the market of a small group of potentially very influential providers.

Perhaps the biggest splash will be made by the Post Office, which unveiled its new current accounts this week (see pages 4 and 5 for more). The Post Office is a trusted household brand with more than three million financial services customers and more outlets than all the UK’s banks combined. The absence of an in-credit interest rate is a drawback, but its new accounts are simple and transparent. That the Post Office’s products are operated by Bank of Ireland will bother few people, despite the latter disgracefully hiking its standard variable mortgage rate earlier this month.

But I suspect the Post Office – and even Tesco, with its powerful Clubcard resource – will find it very difficult to lure people from their existing current account provider, even under the new switching rules. Apathy, misconceptions, misplaced loyalty – call it what you will, there’s a deep-seated reluctance to move bank.

As the feature overleaf suggests, it’ll take something seismic to get people switching their banks in the same way they change insurers or energy suppliers. I hope I’m wrong, because actions speak louder than words when it comes to expressing our dissatisfaction with the banking industry.

In THE March Budget, the government finally announced it would consider lifting a ban on transfers from child trust funds (CTFs) to junior individual savings accounts (Jisas). This week, it launched a consultation on the matter.

As it stands, about six million people saving for children have nearly £5 billion lying in high-charging CTFs that offer pathetic returns. They were replaced by Jisas two years ago as the government’s choice of children’s savings vehicle, yet they are not available to people who have opened CTFs. Those that ultimately lose out are the children on whose behalf parents, grandparents and family friends are diligently saving.

Removing the bar on transfers would not only be the right thing to do by savers, for a change. It would also stall the profiteering of CTF providers hiking their charges while offering derisory interest rates, safe in the knowledge that they have no need to attract new business.

This time last year savers were ploughing more than £200m into a corporate bond issued by Tesco. The demand sparked fears that investors were piling in oblivious to the risks inherent in single corporate bonds.

This week, Nuffield Health launched a retail bond paying 6 per cent, while the Jockey Club last month launched one offering 7.5 per cent in a bid to raise funds for a new grandstand at Cheltenham racecourse.

That such retail bonds are popular isn’t a surprise, especially at those yields. People want income and they’re not getting it from cash accounts. Bonds are perceived as less risky than equities, though that’s debatable in the current climate.

Single bonds are especially risky. Few people expect Tesco or the Jockey Club to default on their repayments, but how many investors are checking what exactly the bonds are secured against? And while 5 or 6 per cent may be attractive now, how will it compare against interest rates when the bonds mature a few years down the line?

So they’re worth a look, but the sheer amount of money piling in raises questions as to what investors expect. If corporate bonds are appealing, a better bet is a decent corporate or strategic bond fund that invests in a whole basket of them.