Bill Jamieson: More banks likely to follow RBS lead on charging

NOT all that long ago the idea that banks would charge customers for putting money on deposit would have been laughed at. But today it's Royal Bank of Scotland that's doing the laughing.

Analysts are warning that RBSs decision could spur other financial institutions to follow their European counterparts. Picture: John Devlin
Analysts are warning that RBSs decision could spur other financial institutions to follow their European counterparts. Picture: John Devlin

It has written to warn some of its customers in its investment banking division that it will be applying negative interest rates from today .

Just a few weeks ago when the Bank of England cut interest rates to an unprecedented low of 0.25 per cent, Governor Mark Carney said he wanted to avoid the UK following precedents set in continental Europe. But analysts are warning that RBS’s decision could spur other financial institutions to follow their European counterparts.

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Andrew Lowe, analyst at Hamburg-based Berenberg, Germany’s oldest private bank, told the Financial Times that banks in Germany and Switzerland have started to charge for deposits. “Importantly, it’s to corporate customers, or very wealthy people.”

But he added, “You are likely to see the UK banks follow suit, in particular if rates fall further.” Ulster Bank, the Irish lender that is part of RBS, already imposes negative rates on some large corporates. And it emerged last month that RBS had written to more than one million business customers warning them it could charge for deposits if rates fell below zero.

Some banks and insurers are said to be considering hoarding cash in high- security vaults to avoid charges with central banks.

For investors, and for businesses large and small, all this sparks two worries. First, no matter how low interest rates fall, there is still a need to hold cash for reserves or emergencies – or because of a dearth of attractive investment.

Second, the drive to negative rates has coincided with an uptick in inflation due to the fall in the pound post the BREXIT vote. The Consumer Price Index has clicked up to 0.6 per cent while the Retail Prices Index – more reflective of inflation experienced by households – has risen from an annual rate of 1.6 per cent to 1.9 per cent.

Risk-averse pension investors are being driven to include dividend-yielding equities in their asset mix, while others have turned to gold or gold-related assets. Gold has risen more than 25 per cent this year.

While there may be no immediate need for bank retail depositors to be concerned, the arrival of negative interest rates in the UK is a worrying development.

Not so absolute returns

The resort to ultra-low interest rates and the arrival of negative rates on some government bonds has been making life difficult for that popular haven for investors – so-called absolute return funds. Many have posted negative returns in the first seven months of the year – while attracting tens of millions of pounds of investor money.

According to investment website Morningstar, Targeted Absolute Return funds – multi-strategy, or multi-asset investment vehicles - saw £6 billion inflows between January and July. And a recent survey from Baring Asset Management ahead of the EU referendum, revealed that 27 per cent of financial advisers were encouraging investment in multi asset products to combat stock market volatility. Marino Valensise, head of multi asset and income at Barings, commented, “Given the market uncertainty, it is good to see a high percentage of IFAs who are recommending clients increase exposure to multi asset products, which can limit downside risks while making the most of growth opportunities.”

But not all such funds have delivered the returns that the nomenclature suggests. Morningstar reports that the Aviva Investors Multi-Strategy Targeted Return fund lost investors 1.3 per cent in the first seven months of the year – while attracting more than £1.2 billion of inflows during this period.

The Henderson UK Absolute Return fund recorded £656 million inflows from January to July but delivered negative returns of 0.2 per cent

Particularly popular with Scottish investors has been the Standard Life Investments Global Absolute Return fund which attracted £596 million of inflows as investors sought refuge from volatile equity markets. But after a disappointing first quarter the fund is below its “cash plus 5 per cent” target over three years.

The Threadneedle UK Absolute Alpha fund, which similarly aims to achieve an absolute return irrespective of market conditions over the long term and attracted £138 million of inflows since January, lost 3.8 per cent over this period.

Managers will cry “unfair!” as the funds are intended to be long term vehicles and should not be judged over a few difficult months. But they will need to do a lot of catching up over a period that looks no less uncertain.