Archive for the ‘Money’ 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.


Why the introduction of “Simple Financial Products” may do more harm than good

The introduction of "Simple Financial Products" scares the pants off me

The introduction of "Simple Financial Products" scares the pants off me

The plan for a new "Simple Financial Products" kitemark could run the risk of misleading customers into getting poor deals. While I know many would’ve thought I’d support it – unless done right, it risks more harm than good.

Listen to this on Radio 5

I’m writing this blog on the back of a debate on Radio 5 I was involved in on this, so the best thing to do is for you to listen to that.

Radio 5 discussion on Simple Products

My main worry is about pushing simple products

If you can’t listen to that, then here (scrappily written while waiting for a train at the station), are my main concerns. I haven’t yet read the full plans so if these are covered off – great, if not, they need addressing.

  • CAT standards didn’t work.

    We’ve tried simple products before – it was the CAT standard and it failed. The products may’ve been simple but they didn’t trouble the best-buy tables.

  • Providers use it as a way to give worse rates.

    The risk is (and this is what happened with CATs) that because they have the ‘simple products’ stamp, their marketing concentrates on that and therefore they don’t need to offer as high rates, as people who are already scared of financial services go for the safety of the kyte mark even if it’s not the right deal for them.

  • Simple isn’t better. 

  • In itself simple isn’t always good – finance is and can be complex – like many other things in life. What we really need is financial education so people can understand the variance of products out there (thankfully its coming, see Financial ed. to be added to curriculum).

    Of course, where products can be simple and competitive that’s great – but it can’t always be the driving force. It’s not simple I want, it’s clear and transparent and without catches – not quite the same thing.

  • It could end up killing things that help.

    The classic example is introductory savings account bonuses. Here, a good chunk of your interest is made up of a 1-2 year rate hike, which once it ends means your rate plummets.

    During high interest rate times, these were relatively meaningless and I, like others, used to push for ‘clean accounts’ where the rate was fair.

    Yet in these times of pitifully low rates – actually they’ve become a boon. A savings rate that promises 2.5% of which 2% is a year’s bonus is effectively guaranteeing a minimum rate of 2% for a year (unless the UK moves to negative interest rates, which we’ll deal with in the extremely unlikely event it ever happens).

    That guarantee is worth having. Of course you need to accept that in a year’s time you’ll need to ditch and switch, but the same’s likely true of clean accounts anyway – as they can drop their rates whenever they want too.

    The original discussion on simple financial products was to avoid products like those with bonuses – pushing people away from the only accounts paying anything resembling decent interest right now.

    More in my Why I disagree with banning bonus rates blog.

  • Products should be in plain English anyway.  

  • Listening to the organisation responsible for ‘simple products’ on Radio 5, it seems the concept has moved more towards this just being about plain English. 

    Of course this is a good aim. Yet to treat customers fairly, all firms should use plain English anyway. To give those a stamp that do – lets off those that don’t. They simply shouldn’t be allowed in the marketplace if their product isn’t being explained properly.

    And even if we do use this kitemark system, if it is simply a plain English criteria then call it that, "Plain English Products", rather than something else.

I’d love your thoughts.

Using plastic overseas? Always PAY IN EUROS (even if it says 0% commission)

Using plastic overseas? Always PAY IN EUROS

Using plastic overseas? Always PAY IN EUROS

I couldn’t believe my ears. While filming in southern Spain for the new series of my show, the producer told me he’d found a cash machine offering 0% commission if you chose to withdraw in pounds. In theory, that’d mean PERFECT exchange rates.

I checked, and indeed the screen said just that. Yet I smelt a rat.  However before we get into that, let me just give you the crucial definitions:

Use a debit or credit card in Europe, either for cash from an ATM or in a shop, and you are sometimes given a choice between…

  • Paying in euros. As you’re charged in euros, your home bank or credit card company does the conversion for you. Typically this is at the Visa/Mastercard exchange rate (which is, basically, perfect) plus a 3% load – so Β£100 worth of euros costs you Β£103.

    However, if you have one of the specialist cheap travel credit cards, which are load-free worldwide, Β£100 of euros costs Β£100 (the main ones of these are Halifax Clarity, Nationwide Select, Saga, Post Office, Santander Zero – click the link for full details on each)

  • Paying in pounds. This choice is known as ‘dynamic currency exchange’. What it means is when paying or withdrawing cash on a card, you can opt for the conversion on the hoof. 

    In other words, rather than your home bank, the foreign bank (or the store’s bank if you’re buying something) does the currency conversion for you.

When 0% commission is NOT 0% commission

After my producer’s enthusiasm I decided to investigate and and do some calculations. I took a picture of the screen:

Banca March ATM withdrawal screen

Banca March ATM withdrawal screen

While it sounded good, the rate didn’t look special. Yet then I noticed the key phrase:


So this isn’t the super-duper Visa/Mastercard wholesale rate, it’s the bank’s own wholesale rate, and frankly, that’s a pile of pants. It’s made its profit in the underlying rate, so no wonder it can then say it’s 0% commission.

On that day it was charging Β£91.50 for 100 euros. But if you’d actually got it at the perfect rate on the day, it would’ve been Β£86.50 – a huge difference, even on a relatively small withdrawal.

So I went to the nearest cash machine I could to see how consistent this was.

Banco Sabadell ATM withdrawal screen

Banco Sabadell ATM withdrawal screen

This one, Banco Sabadell, is again using its wholesale rate – then adding 2.5% commission on top. Yet even with that, it’s still cheaper at just Β£89.15 for 100 euros.

Then, purely for research sake, obviously, I went to a restaurant I knew offered the option to pay in pounds or euros…

Restaurant rate

Restaurant rate

This one was based on the "Visa wholesale rate" but with 3% commission. Yet its overall rate was therefore identical to Banco Sabadel, with its 2.5% commission on its own rate.

The best way to pay or withdraw cash abroad

So, to wrap it all up, I did a few more comparisons on the day, just to prove exactly how it works. Here’s my table:

What Β£100 would buy you in euros
  Paying in? How much you’d get
SPEND on load-free specialist overseas card Euros €115.60
ATM withdrawal from ANY Spanish bank with specialist overseas card Euros €115.60 + your card’s fee, usually Β£1-Β£3
TravelMoneyMax best bureau de change rate, for collection (London) N/A €114.70
ATM withdrawal from Banco Sabadell Pounds €112.20 + your card’s ATM fee, usually Β£2-Β£3
ATM withdrawal from ANY Spanish bank OR spending using a typical UK debit or credit card Euros €112.10 + any card’s fees for spending (some debit cards) or ATM withdrawals (most credit and debit cards)
TravelMoneyMax best bureau de change rate, for delivery N/A €110.60 (get out more money and as the delivery fee has less impact the rate is relatively better)
M&S collection rate N/A €110.60
Withdrawal from Banca March at ’0% commission’ paying in pounds Pounds €109.30
Table based on a day with Visa wholesale rate at Β£1 = €1.156.

Therefore the rule is simple

If you have, or get, a specialist overseas card, then there is no doubt that using it and paying in euros is always correct (though do ensure you repay in full to minimise the interest).

Yet even without one of these, if you’re using your plastic abroad, while the chart shows with one bank there’s a very minor gain for paying in pounds – it’s negligible. Whereas get it wrong, and you can lose out a lot. So for safety and simplicity’s sake, the golden rule is:

If using a card and you’re asked whether you want to pay in pounds or pay in local currency (eg Euros) ALWAYS say the local currency (the same almost certainly applies US Dollars when in the states or other currencies elsewhere too)

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.