New Bank of England figures support what many had suspected – that banks are using the funding for lending scheme (FLS) to boost their margins.
The FLS was launched last August and has been heralded as a success, especially in the context of the rebound in mortgage lending. But while lenders have taken £16.5 billion from the FLS, their lending in the first quarter of this year was lower than in the corresponding period in 2012. Net lending by the banks and building societies accessing cheaper borrowing through the £80bn FLS actually fell by £300 million in the three months to the end of March. Lending fell in the previous quarter too, even as lenders drew almost £14bn from the FLS.
Yet savers have long known that for the big high street banks in particular the FLS is merely an opportunity to fatten their margins. The cheap money that lenders are getting through the scheme is being used to shore up loan books, instead of being passed onto those in need of affordable finance. Meanwhile, the FLS presents the ideal opportunity to fleece loyal and long-suffering savers.
Take as an example Royal Bank of Scotland, which posted a £1.6bn decline in net lending in the first quarter. Mortgage borrowers have, on the face of it, benefited from the FLS. Its two-year fixed rate at 60 per cent loan-to-value (LTV) has fallen since last August from 2.99 to 2.28 per cent, according to data supplied by Moneyfacts. Its tracker deals and longer fixed rate mortgages have also come down.
So far, so good. Until you look at what RBS has done to savers over the same period. The interest paid on the RBS one-year fixed rate Isa has slipped from 2.1 to 1.8 per cent since last September, with the two-year deal down from 2.4 to 2 per cent. Its savings rates have fallen across the board.
The bank hasn’t reduced interest rates, so it can only be RBS abandoning savers because the FLS means they don’t need them. RBS is far from alone in this. The average rate paid on cash Isas has plunged from 2.5 per cent when the FLS began last August to just 1.74 per cent today.
The best instant access account now pays just 1.8 per cent, somewhat less attractive than the 3.19 per cent available ten months ago.
But while banks reduced lending to households and businesses, mutuals increased theirs by £2.3bn in the first three months of the year. And while they’ve also reduced savings rates, the cuts have typically been far more modest. Building societies (including those that have used the FLS) remain prominent in the best buy savings tables alongside the likes of Bank of Cyprus and State Bank of India.
The banks point to the improving mortgage market when defending their use of the FLS; the fall in lending to businesses reflects only limited demand, they say. But you’ll hear nothing about their savings policy. The profiteering is so blatant that even the banks don’t try to offer excuses for it.
Even if you don’t trust pensions, one of the chief arguments in favour of joining your company scheme – the contribution from your employer – is compelling. It’s practically free money. Not sure the money the company pays into your pension makes a difference in the long run? Consider how not getting that top-up affects self-employed pension savers.
A new report from Prudential estimates that self-employed workers miss out on almost £92,000 of employer contributions to pensions over the average working life. A worker on the average UK wage of £26,664 and who is a member of their company scheme will benefit from £2,232 a year in employer contributions to their pension.
It’s a lot to miss out on, even before factoring in the 46 per cent of self-employed workers with no private pension savings to fall back on.
It’s all quite obvious and doesn’t account for the efforts that many self-employed workers make to compensate for the lack of a workplace pension.
But automatic enrolment means millions of people will be paying into company pensions for the first time over the coming years. While the ranks of the self-employed are swelling they’re in danger of falling behind when it comes to pension savings.