Capital Markets Corporate

September 13, 2019

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Across Instinctif Partners’ Financial Services team, we are always keeping an eye on the key developments taking place across the sector to evaluate their impact on the many businesses we work with. Here we share our picks of the week’s most interesting news, and our expert views.

The mis-selling shams hiding in plain sight
With the end of PPI, claims firms will be seeking the next financial scandal. One area where consumers could be in line for future refunds is the packaged bank account market. According to complaints service Resolver, the accounts were its sixth most complained-about category last year, with 270,000 complaints received since 2015. Critics claim bank staff have been given high targets and pressured to sell as many fee-charging accounts as possible. (From the Telegraph, September 7th, 2019)

The Bank of Mum and Dad are suing their kids
The nation’s Banks of Mum and Dad – now collectively a top ten mortgage lender – are increasingly taking their children to court. There has been a threefold rise in cases where parents who have helped their children into the property market go on to sue them. Most cases can be traced to ambiguity in whether deposits for a first home were gifted or in fact a loan. (From the Telegraph, September 7th, 2019)

HMRC glitch over-taxes middle earners
People earning between £70,000 to £80,000 a year may fall victim to a glitch in the HM Revenue and Customs’ software that causes their received pay to fall by hundreds of pounds per month when they receive a bonus. The Government system falsely registers bonuses as recurring monthly payments and taxes people according to the perceived higher annual salary. Notably, it impacts the personal allowance people earn each year without paying tax, which gradually decreases for those who earn above £100,000 (From the Express, September 8th, 2019).

Think tank calls for wealth tax hike
A leading think tank suggests the UK Government could acquire £90bn in additional revenue in the next five years by taxing income from wealth like they tax income from work. The Institute for Public Policy Research argues that current lower tax rates on property, shares, fine art and wine are “unfair and outdated”. Tax rates on assets are around 20% – and 28% for property – while high-income earners pay 40% tax on their income (From The Guardian, September 9th, 2019)

Pension scheme trustees hold company hostage
The Thomas Cook Group pension scheme trustees are holding the company hostage for better terms in exchange for backing a £900m restructure rescue bid. In a move that underlines the power of pension scheme trustees and ultimately company pension holders, they are demanding a commitment from the new owners to maintain annual contributions. The demands have complicated the rescue bid and may result in the cancellation of Thomas Cook’s public listing. (From Sky News, September 7th, 2019)

Savings Rates Approaching Zero

Long-suffering savers were dealt a fresh blow this week when rates on popular savings accounts began to tumble. With the prospect of zero percent interest rates looming, financial providers must consider how to best serve savers, and the important role communications can play in shaping this.

The Bank of England’s base rate has hovered at less than one percent since 2009. One of the advantages of this sustained period of low interest has been cheap borrowing, with mortgage and credit card holders enjoying low repayments.

However, from a savings perspective, the outlook is less fortunate; as interest on savings struggles to keep up with inflation, the value of money is essentially falling over time. Moreover, most banks and building societies have been criticised by consumer advocates for failing to pass on any rate rises the central bank has enacted.

The Bank of England has previously warned it would cut interest rates in the event of a no-deal Brexit, and with Parliament prorogued and the chances of reaching a withdrawal agreement seemingly further away than ever, savings providers have reacted by slashing rates even further.

As many as 14 popular savings products had their rates cut in September compared to August, including the popular Marcus by Goldman Sachs, which made waves by offering a market-leading 1.5% easy access rate when it launched last September.

At the same time, the government-backed savings provider NS&I has withdrawn two bonds products from sale whilst cutting rates on other products.

Worryingly, the fall in rates comes at a time when retirees are reportedly increasingly withdrawing cash from their pension pots and depositing the money into easy access accounts.

Savings are essentially the cornerstone of financial planning, and something most institutions would recommend as part of an effective strategy for building long-term financial health. But how to square this with the fact many savings accounts are becoming increasingly poor value?

The key could be to focus on the benefits of creating and maintaining a culture of saving. Rainy day funds are vital in any interest rate environment, yet the extent of the communications challenge is laid bare by the fact that Government support to boost low-income savers is currently under-subscribed. On the plus side, studies have found that immigrants who come to the UK from a country with a strong culture of saving money continue their savings habit in the UK, even if rates aren’t favourable.

Rates are an important driver for deposits, but it might be that encouraging a change in behaviour may be more important in the long run.

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