http://business.timesonline.co.uk/tol/b ... 874631.ece
The Sunday TimesJune 3, 2007
Revealed: the £1.5bn savings con
Whistleblowers confess that banks employ teams whose main purpose is to find ways to bamboozle customers and boost profits after rate rises
Clare Francis
WHISTLEBLOWERS have revealed the tactics used by banks and building societies to fleece customers following interest-rate rises – a strategy that will cost savers £500m from last month’s increase alone.
Banks and building-society staff are ordered to pass on the full Bank of England rate rise only to the most recently launched savings deals while more established accounts, in which loyal customers have saved billions of pounds, benefit from only a partial increase.
High-street institutions have trumpeted savings hikes of up to 0.8 percentage points since May’s quarter-point rise, but the majority of savers have seen much lower increases in a calculated policy to boost margins.
This tactic has netted the banks £1.5 billion since August, when the Bank of England first started raising rates. They have gone up four times since then, to 5.5%, in a move that should have been a boon for savers.
However, banks and building societies have “product” teams who, when rates go up, are ordered to trawl through account tiers and work out what they can get away with.
A whistleblower who worked on the savings team at one of the country’s largest banks for 15 years said last week: “It’s a very tactical balancing act. We were told to balance the need to pull in savers with what we could get away with – the last thing they wanted was a mass exodus that could damage the brand. That’s why you’ll often see a flagship product go up by the full amount, or more, while other accounts will move by very little if at all.
“Now we’ve had four interest-rate rises, some organisations will look at what they’ve been able to get away with before, and push it a little more each time.”
The average mortgage rate has gone up by 0.28 percentage points since May, even though Bank rate is up only a quarter point. After January’s increase, most lenders matched the Bank rate increase, so their rate manipulation strategy is getting bolder.
A second whistleblower, who worked at another of the country’s biggest banks, said that the rate strategy came right from the top. “The orders come from the board, which looks at which accounts are bringing in profits,” he said.
“My bank operated an explicit best-buy strategy – it regularly launched market-leading accounts that would get into the tables, and after it had pulled in enough money we would deliberately make the rate less competitive. We worked on the assumption that 40% of customers would move their money elsewhere, but 60% would stay put.”
Bank rate rose from 5.25% to 5.5% last month, yet the average savings rate has gone up by only 0.22 points, according to research by AWD Chase de Vere, an adviser, while standard variable rates (SVRs) on mortgages have risen by an average of 0.28 points. This means banks, which made record profits of £40 billion last year, are pulling in more interest from borrowers while paying savers less.
Abbey is typical. It is boasting that its rates are rising by up to 0.8 points, but on closer inspection few people will benefit. Only those with more than £100,000 in its Branch Saver account will see their rate rise by 0.8 points, from 4.2% to 5% – assuming they make no withdrawals. Across the board, Abbey’s savings rates have gone up by an average of just 0.2 points while its SVR has risen by the full quarter point.
And Northern Rock uses a strategy called “gapping”, where mortgage rates go up before savings rates. Its SVR went up from 7.34% to 7.59% on Friday, but its savings rates, which are rising by an average of 0.22 points, do not change until June 9.
Moneysupermarket, a comparison web-site, has calculated this delay will net the bank around £123m, and its decision not to pass on the full quarter-point rise to all savers will save it £3m a day in interest payments.
Sue Hannums at Chase de Vere said: “I think it’s shocking for the country’s largest savings providers to short-change customers in this way. Customers are having to be so vigilant because of rate manipulation.”
Alliance & Leicester (A&L) and Halifax are the worst offenders. Both increased their SVR by the full quarter-point but their savings rates went up by an average of just 0.18 points. Since August their savings rates have risen by only 0.74 points and 0.75 points respectively, while Bank rate is one percentage point higher.
For many of Halifax’s Websaver customers, it is the second time this year they have lost out. It has two versions of this account – one with a cash-machine card and one without. Having missed out on any increase following January’s rate hike, many savers with money in the account without a card have seen only a 0.05 point rise this time. Only those with £25,000 or more will benefit from the full quarter-point increase. Halifax defended its decision, saying the accounts and tiers that have seen the full increase are the ones savers use most.
Kevin Mountford at Moneysupermarket said: “If you are paying your lender’s SVR then you should remortgage, and if your savings rate is less than Bank rate, or has not gone up by the full quarter-point, then move to another account.”
Harriet Tierney, pictured, is doing just that. The 21-year-old student at Aberystwyth university has had a Halifax Websaver account for about four years She said: “I opened this account because I’d had a payment from my mum’s life insurance and I wanted somewhere to invest my student loan that paid a good rate. I am shocked that I am not getting the full benefit of rate rises and will switch.”
Northern Rock denies it makes money from gapping: “While it is always a balancing act to cater for the needs of savers, borrowers and the business, there can never be a straightforward comparison because savers outnumber borrowers and several factors have to be taken into consideration.”
Where to find a decent deal
BANKS may be manipulating rate rises, but the good news for savers is that fixed deals are higher than they have been for many years.
The flipside is that fixed-rate mortgages have been becoming more expensive, but there are still some good loans around. We offer some tips.
Where should I go if I want to fix my savings? Anglo Irish Bank is offering a one-year fixed-rate bond at 6.45% and a two-year bond at 6.35%. Both are available on balances of £500 or more.
Most economists expect another rise in Bank rate to 5.75% this summer, with some even predicting it will go to 6%, but these increases are already factored into fixed rates, so analysts say the deals are unlikely to go much higher.
Advisers, however, recommend that you do not fix for more than one or two years, just in case rates go higher than expected and you are left with an uncompetitive deal.
What about variable rates? They are lower than fixed rates, but you may get the benefit of more rate hikes.
Icesave is paying 5.95% on balances above £250 and the account comes with a guarantee that it will pay at least 0.25 points above Bank rate until 2009 and then at least Bank rate until 2011. Icesave has a good track record of passing on increases – so far. It was only launched last October, but has passed on the three rate rises since then in full.
Chelsea building society and Citibank are both offering rates of 6%, although they include short-term bonuses, so you will need to move again once the bonus has come to an end.
Watch out for accounts such as HSBC’s Online Saver, paying 6% from tomorrow, and Alliance & Leicester’s Direct Saver at 5.8%; they do not pay interest in any month you make a withdrawal.
I’m looking for a mortgage, what should I do? If you want protection against further interest rate rises, go for a fixed rate.
Several lenders, including Nationwide building society and Northern Rock, increased their fixed rates last week and Abbey’s rates are going up tomorrow, but there are still some competitive deals around.
Scarborough building society has a two-year fix at 4.98%. This is available for loans up to 95% of a property’s value and those remortgaging receive a free valuation and free legal work.
There is a £1,495 arrangement fee, however, although this can be added to the loan so you don’t have to pay it up front.
If you want longer-term security, Britannia building society has the best five-year deals. It has a rate of 5.49% with a fee of £499. The minimum deposit is 5%.
However, if you are remortgaging, you would be better off with Britannia’s 5.64% fix because this offers a free valuation and free legal work. The fee is £399.
Some economists believe rates will peak this year and start to fall again in 2008. If you share this view, you may prefer a variable-rate deal.
David Hollingworth at L&C Mortgages, a broker, said: “Go for a tracker rather than a discount because the latter are linked to the standard variable rate (SVR) and changes are at the lender’s discretion. And as many borrowers have found out to their cost recently, lenders sometimes hike their SVRs by more than Bank rate.”
Bank of Scotland and Birmingham Midshires increased their SVRs by 0.35 points following last month’s rate rise.
Standard Life Bank put its SVR up by 0.3 points and Intelligent Finance hiked its rate by a massive 0.45 points – 0.2 points more than the Bank rate increase.
Halifax has the best two-year tracker at 4.99%, available through brokers only. The minimum deposit is 10% and there are freebies for remortgages. The fee is £1,499.
