Archive for the ‘Consumer’ Category

A warning to FCA boss Martin Wheatley – please don’t screw up the savings market

A warning to FCA boss Martin Wheatley – please don't screw up the savings market

A warning to FCA boss Martin Wheatley – please don't screw up the savings market

I read with horror a BBC news headline yesterday – Financial Conduct Authority (FCA) hints it may act act on ‘teaser’ rates – based on comments by the new regulator, the FCA’s (was the FSA) boss, Martin Wheatley. Thankfully, later in the piece it says he wouldn’t consider an outright ban on teaser rates, just some tinkering. However it still concerns me.

This is all about canning introductory bonus rates on savings products, which are used as bait to draw new customers in. In the past, when interest rates were high, I warned about them, yet with today’s dire interest rates, it needs to be understood they are the ONLY thing allowing savers to earn decent rates.

I have written before on this, see my I disagree with The Sunday Times call to ban bonus rates blog, so let me explain it in a different way this time (this blog has been bashed out at speed so forgive the poor prose).

Why we need bonus rates of interest right now

Getting rid of bonuses assumes ‘non-bonus’ accounts pay consistent rates. Yet all easy-access savings are ‘variable rate’, which means banks can, and do change rates (ie, drop them) willy nilly – not just when the Bank of England moves UK rates – but for their own competitive reasons too. So the idea that it’s only bonus rates that are inconsistent is simply wrong.

There are also many clean rates out there which once started as market-leading deals, but are now dismal at 1% or less.

Now let’s contrast that with an account with an introductory bonus as part of the initial rate – effectively a temporary interest hike to attract new customers.

Take the Cheshire Building Society’s current cash ISA product (see our Top Cash Isas guide for the best rates). It is 2.3% AER with a 1.8% bonus lasting until 31 October 2014. That means it has three advantages over standard variable deals:

  1. A high initial rate

    All the top deals are intro bonus rates, which pay more than non-bonus rates.

  2. We know when the rate will drop

    Unlike non-bonus ‘variable’ accounts where the rate can drop at any time – here we have a defined period of a higher rate – and a date for the diary to ditch and switch. It actually means less monitoring is needed as you have more certainty of knowing when it’s going to go bad.

  3. It acts an an effective minimum rate guarantee

    In some ways, big bonuses like this are the holy grail of savings in a low interest rate environment, as the bonus acts as a 1.8% minimum rate guarantee lasting 18 months. 

In a low interest rate environment, we must accept that keeping savings rates as high as possible needs active aggressive saving. Getting rid of bonus rates won’t change that, it’ll just mean lower rates, needing more work.

I’d love to see a savings environment with more tracker-type rates, which give decent, consistent returns. Sadly, the only ones available right now give awful rates. So in these days of dismal interest, to call for something which risks decreasing the rate available for savers is a dangerous move.


A generation of Muslims not able to go to university?

A generation of Muslims not able to go to university?

A generation of Muslims not able to go to university?

I had a rather depressing day last Wednesday. I was filming a piece for my new series on student finance at a sixth form college in Hammersmith, west London, and there were many sparky 17-year-olds there. 

My aim was to try to ensure they weren’t wrongly put off going to university because of the misperceptions over student finance in England. While much of that involves an explanation – there’s a more serious problem for religious Muslim students.

(For more on the general issues, see Student Finance Mythbusting and Student Loans aren’t a debt – time to rename them?)

Under Sharia law, paying interest is prohibited. This is why Islamic banking often works using a capital, rather than interest repayment. 

Now, of course, the new student loan system (introduced for starters in 2012 and onwards) isn’t the first time interest has been charged – but it is the first time it has been at ‘real’ interest rates. In the past interest was set at the rate of inflation (see Should I Repay My Student Loan? for a full breakdown) meaning that in effect, it had no real cost. So from what I’m aware, some Muslim students found it acceptable.

Yet under the new system, real interest, set at up to 3% above RPI inflation is attached to student loans (see student loan interest). And while in practice many will never get close to needing to repay the interest, as I explain in Why student loans will be interest free for many, that’s not enough.

A decent chunk of the potential Muslim students I met had a real problem with this (of course for some it isn’t an issue, there is always a spectrum of belief) and felt they were unable to take student loans. 

Therefore to go to university, their parents are going to need to find Β£27,000 upfront, plus living costs – an amount simply unreachable for the enormous majority of families.

Now I’ve been aware of this issue in the past, it’s something I’ve discussed with the responsible Government department and I know the NUS has campaigned on it. Yet to be there face to face and meet this group of bright kids who are being disenfranchised was truly depressing.

Something needs to be done – to replicate the system at roughly the same cost to the student in a way that is Sharia complaint, as is done in other forms of finance, can’t be beyond wit and wisdom.

PS. Having tweeted a link to this blog, a number of responses are from people saying things like “we don’t want Sharia law in Britain”. Not quite sure what that has to do with this – of course I’m not suggesting the UK live under Sharia law.

Yet to allow an option of a Sharia compliant system of finance with a similar net result that is compliant with Sharia law, without any special privileges, seems to me a good thing. And for all the “Muslims should integrate” comments, university is great for increasing a widened life experience and social cohesion.

“I tricked my daughter into downshifting”

For years, I’ve banged on about the Downshift Challenge – trying one brand level lower of everything you buy to see if you can tell the difference. If you can’t, then you stick with the cheaper version.

One of the most powerful areas for this is in non-food items like cleaning products, shampoos, bath products, etc. After all, you’re not tasting them.

Yet whenever I’ve done programmes on this, it’s always been the teens who object the most – after all, branding is always boosted by peer pressure. 

So I love the email and photo Nicola W just sent me (she’s given permission for me to reproduce it).

My 16-year-old daughter insists I buy her Herbal Essences shampoo and conditioner.

"The last two times she needed new ones, I bought Morrisons own brand at a fraction of the cost and refilled her bottles. Has she noticed? Not a chance."

"I tricked my daughter into downshifting"

"I tricked my daughter into downshifting"

Update: I’ve been thinking about this a bit more and reading the feedback, which suggests many people do this. In which case, is it not worth revealing this to your kids? Explaining they didn’t notice the difference and talking through branding with them?

You could explain how one reason branded goods are more expensive, is because of the huge promotion and cost of brand-building. Teach kids to be independent-minded in their purchases and test them to do this, rather than believing the hype. This way, hopefully you get to keep saving money, but also give a valuable bit of financial education.

10 changes that’d make the Green Deal more popular

10 changes that'd make the Green Deal more popular

10 changes that'd make the Green Deal more popular

Writing our new Green Deal Mythbuster guide to explain this potentially powerful scheme, was a frustrating task. Enabling people who can’t afford it, to get double-glazing, underfloor heating, cavity wall insulation and more is great. The problem is explaining it is hellish, as the system is over-complex and couched in the language of debt.

My worry is millions will be put off at the outset because of this, and the scheme, which could help improve our very poorly-insulated UK housing stock, will fall flat. Not good for the environment, or people’s pockets, as it’s the only real way to reduce energy bills long-term.

If you don’t know what it is, do read the Green Deal Mythbuster guide first, as this blog assumes you understand how it works. And when I say ‘writing it’, while I spent many hours on it, MSE Helen S and MSE Jenny did the underlying work – it was a big job between us.

Of course some knocking will take place as it’s seen as a political launch. Even on my Facebook page, when I posted the guide there was real venom already from the majority of respondents about how it worked. Comments like:

I think it’s a load of baloney. You need to have a full house survey done at your own cost before you know if you are eligible for any financial help! Useless if you don’t have money behind you in the first place. I need a new boiler but I won’t be using this scheme. Waste of time and money."

No good, as I understand it, 7% interest? Β£150 just for a survey?"

Okay, so you never pay more than you’re ‘expected’ to save, what happens if the savings don’t stack up? Β£120 for an assessment??!!!"

I think that ‘selling your house’ in the future with a loan attached is a BIG issue and for that reason I wouldn’t touch this deal. I know if I was a potential buyer I’d want it to be ‘my choice’ to be tied in to such a scheme and not to be forced to take it on."

Now, at this point, I should say my view is that the scheme isn’t baloney. It has merit, and should (hopefully) work well for many. Yet there are some innate problems with the way it’s constructed. Some are more psychological than practical, yet that’s still a real concern for getting this thing working.

So I thought it worth quickly bashing out the 10 changes I think could make it more appealing to the general public.

Please read this in the context that I think it’s a good scheme – but with too many hurdles, and there’s not enough Colin Jacksons out there.

  1. Don’t call it "The Green Deal".

    Most people are selfish actors. To interest them, you need to focus on what they gain from it, not the environmental benefit. So call it the "Home Improvement Deal", or even a halfway house: "The Home Efficiency Deal".

  2. Don’t charge upfront for an assessment.

    Β£125 million of cashback is being pumped in to get this up and running; yet you will only know if you’re eligible for that by paying a typical Β£125 to get assessed. That’s a huge sum, and more than people are willing to risk.

    There has to be a way of factoring the assessment into the cost for people who do get things done. Of course by having a paid-for assessment, you get a self-selecting group of applicants who are less likely to be browsers and more likely to follow through, but I think it cuts too many out.

    A detailed pre-application web form (and phone service for those not online) that’s binding could do a similar job – giving both the assessor and home owner an idea if it’s likely to be of benefit to them.

    However, at this point, I doubt that will change. So why not divert some of the proposed cashback money into free government assessment vouchers, again with an online pre-assessment first?

    Certainly we’d be happy to distribute them from MSE at no cost, eg, 20,000 x Β£100 vouchers. This way, you may actually find you’ve a decent number of people who’ve used the scheme and have good things to say about it. (Of course, again, there should be a pre-apply form so only those who are likely to act get them.)

  3. Allow it to be repaid when you move home.

    Many people fear having a Green Deal loan attached to their house, as it’ll mean no-one will want to buy their house. I think that’s overblown, as these insulation measures in themselves will make the house more attractive and thus more likely to sell. Yet that doesn’t matter – the fear itself is enough to prevent the scheme working.

    My suspicion is many new buyers will ask for the remaining Green Deal loan to be taken off the house price. However, it’d be far easier to simply say: "I’ll pay it off" to the new buyer. 

    This is one reason having redemption penalties on these loans is just so silly. If people could simply use the cash to clear the debt when selling their home – at no extra cost – you’d mitigate this worry somewhat.

  4. The loans should not have interest attached

    This was the one thing that made me truly despair when I read the Green Deal proposal. Why on earth make it an interest-charging loan? Many people are rightly debt-averse. 

    It’s the student loan debacle all over again (once you understand it, it’s not as bad as you thought, but most people don’t get to the point of understanding it).  

    While these loans are very different from commercial borrowing due to the golden rule that you shouldn’t repay more than you save, that just doesn’t cut it for most. They see the interest figure and say "no loan".

    I accept there’s a cost attached to the financing. Yet even learning a trick from the sofa sellers and charging more upfront – so that there’s no interest, just a fixed repayment based on that – would’ve made it easier for people to stomach.

  5. Not allow it to be sold door-to-door

    This risks lowering the reputation of any service when it’s sold this way. (In plain terms, sell it door-to-door and it makes many feel it’s dodgy or shoddy.) I know there are rules saying door-to-door Green Deal sales must obey "no cold callers" signs, but still, was it necessary to have it pumped out like this?

    One worry is salesmen showing up on the doorstep saying “I’m from the government”.

  6. Standardised maximum pricing

    We don’t yet know how the assessors and installers will price, but many are worried they’ll pump up the cost in a way that negates the benefit of the financing in the first place.

    As this is a Government scheme, I’d think some form of price regulation on the 50 or so things you can have fitted within the Green Deal scheme, or even fixed prices, would give more confidence that you’re not getting ripped off.

    It’s worth remembering one of the new things the Green Deal lets you save on is double-glazing. That industry is haggle central – I’ve heard of cases of people being charged 10% of the original opening price for the same thing. It’s not good for the Green Deal if it falls into the same system.

  7. If interest will be charged – let people know what it is

  8. The fact we don’t know the Green Deal interest rates yet, even after the scheme has launched, is ridiculous. Even once we do know them, they will vary with the length and amount of borrowing.

    People need to know even before having an assessment what this is likely to be. Firms need to publish their loan rates for different amounts (or do it via an online tool).

  9. Loans shorter than 10 years should be allowed

    Cavity wall and loft insulation will pay for themselves in a far shorter period than the effective minimum 10-year loan. So why are people forced to borrow longer? A golden rule of borrowing is to repay as quickly as you can, as it minimises interest. 

  10. No early redemption penalties

    People should always be allowed to pay off their debts earlier with no charge if they choose to. Full stop. End of.

  11. Centralised information and application

    To make this scheme work, it needs to feel official and authoritative. Some form of central call centre to give people official information before passing them onto a selection of reputable firms would give greater confidence (this may be being done, I’m not aware of it though), although I accept it would take some market forces out.

OK, those are my 10. Do you agree with all, or most of them? Or do you disagree with some of them, and if so, which ones? And do you have any of your own suggestions? Let me know below.

Will there be an ISA season this year?

Will there be an ISA season this year?

Will there be an ISA season this year?

Every March and April, it’s cash ISA season. Banks and savings institutions fire out very hot rates – typically 0.5-1 percentage point higher than the best buys from before the cash ISA season started.  

The reason is simple. One ISA year ends on 5 April, the next starts on 6 April – so you have two years’ worth of ISA openers clamouring to get their tax-free savings cash sorted at the same time. 

For the first time though, I’m questioning whether we’ll actually have an ISA season this year.

Savings rates are depressingly low. Even in the current era of the 0.5% UK base rate, savings rates are dire. In the last few months, cash for banks has been available from the Funding For Lending scheme, so banks haven’t needed to raise money via deposits. Therefore, savings rates have nosedived.

Where once 3% was the minimum you could expect from the top of the best buy tables, now rates have plummeted through that floor and the top accounts barely scrape above 2% (see the Top Savings Accounts guide).  

The rates for cash ISAs have fallen too – though not quite as far, 2.5% is still just possible.

My concern is things are so bad, banks don’t want to top best buy tables. In fact, we’re seeing the perverse situation that when they find themselves there (usually because another bank that was paying more has dropped its rate, leaving them exposed at the top of the pile) they quickly cut rates to escape it. So much money floods their way, they’re too highly exposed even to keep rates at 2.1%.

If we do have an ISA season this year – with rates rising rapidly – I’m guessing it’ll be primarily focused on products that don’t allow you to transfer in past years’ money. That way, providers’ maximum exposure is limited, and cash ISAs are good bait products – they can offer a higher rate, build their brand, and use their headline rates to show their ‘competitive’ credentials.

This will be done for the associated branding gain from being top of the pile, but still only exposing the bank to around Β£5,000 per person at a loss-leading rate, rather than the potential for Β£100,000s worth of old ISAs to be shifted in.

I hope to be proved wrong.