The internet has opened up a whole new market to many consumers, and the financial sector has been effected more than most.  As consumers endeavour to squeeze the last penny out of their income, many of the UK population use the internet to find the best rates and the best offers around – trying to save themselves a few pounds in the process.  But how simple is it to move banks?

In the past, many people have shied away from moving banks because of the excessive amounts of paperwork involved, phone calls and problems with direct debits and standing orders.  Thankfully, over the last few years (since the introduction and take up of the internet) we have seen some major changes with regards to the process of transferring banks.

Now it is often as simple as filling out a form online, printing off a copy, and posting it to the bank.  The bank will then take care of the transfer from your old bank, ensuring that the exact set-up of your account is transferred, including direct debits, standing orders, etc.  While this process may take a little while, it is no where near as cumbersome and long winded as it has been in the past.  It is possible to take advantage of the many offers which pass your way each day – with very little effort from you!

As the interest rate cycle continues to move still higher, we are regularly hit with the news that this is good for savers who are feeling the full benefit, but who really makes the money as interest rates rise?

You will not be surprised to see that the banking corporations can very often increase their profit margins in a rising interest rate market, and the chances are that you will not even notice it.  This is done using a very simple trick – increase borrowing costs by more than savings rates, thereby increasing your profit margins in an instant – but does it really have a major impact?

Let us show you how the situation can work :-

Prior to the last interest rate rise, let us assume the following :-

Base Rates   5.50%

Consumer Saving Rates   5.25%

Consumer Borrowing Rates 6.50%

In this situation a bank would make 0.25% on each pound of savings, if they were to put that straight back on deposit, however if they were to lend that to a customer  they would make 1.25%.  The profit margin for each situation would be :-

Placing consumer savings on deposit :-

100 * (0.25/5.25) = 4.76% profit margin

Lending consumer savings to borrowers :-

100 * (1.25/5.25) = 23.8% profit margin

However, let us assume that interest rates rise to 5.75% (as they have), and consider the following changes :-

Base Rates   5.75%

Consumer Saving Rates   5.40%

Consumer Borrowing Rates 6.80%

As you will see, in this situation savings rates have increased by less than the rise in base rates, while borrowing rates have been increased by slightly more.

The calculations are now :-

Placing consumer savings on deposit :-

100 * (0.35/5.40) = 6.48% profit margin

Lending consumer savings to borrowers :-

100 * (1.40/5.40) = 25.92% profit margin

While these increases in the profit margin of the banks may not sound much on the face of it, when you consider that the industry deals in billions of pounds each year, even a small increase in profit margins can have a massive impact upon the profitability of a company. 

This is just one of the ways that the banks use interest rate rises to increase their profitability, a technique which very often goes unnoticed unless you actually sit down and work out the figures!

While many are still trying to work out how the recent interest rate rise will effect them, it seems that there may be more misery on the way fairly soon.  If analysts are correct, it appears that rates are set to rise yet again in the short term with a move to 6% (and beyond) expected very shortly.  But why are rates set to rise further?

We have a raft of economic indicators due out over the next seven days, with many expecting them to show :-

· little change in the ongoing demand for property – pushing prices still higher.

· strong consumer spending.

· a further increase in the rate of inflation.

These are all signs that the Bank of England had hoped would be diminishing after the recent round of interest rate rises, but it seems that the consumer has yet to react to the increased cost of borrowing.  This will dismay the Bank of England governors who had been encouraged by indications that spending was reducing a couple of months ago.  However, this proved to be a short term dip, and we are back on the road of strong consumer spending, with many predicting a sharper shock for the consumer, the higher interest rates rise.

Why is the consumer so intent on a spend, spend attitude?

It is difficult to see why the consumer has not yet appreciated the higher cost of borrowing, although this may be down to the fact that many home owners had been on cheap rate introductory mortgage offers, the vast majority of which will be coming to an end over the next 12 months.  With interest rates having doubled since many signed up, they are about to see a massive increase in their mortgage payments.

Over the last few months we have seen a slight increase in the bad debt provisions of the main banking groups in the UK, a sure sign that they expect an uncomfortable ride over the short to medium term – although not half as uncomfortable as many home owners with large mortgages!

While we have all seen the press over the last six months with regards the potential reimbursement of banking charges, which appear to break an ancient rule regarding the cost of services, the saga is still no where near being resolved.  There have been payments, court case, victories by the banks, yet today the situation has taken a new twist.  The Chorlton branch of the Abbey National have today received a visit from bailiffs looking for a payment of £2,769 which was awarded to a customer, against the bank.

The award goes back some weeks to a court case which ruled in favour of bank customer Sam Umaar, ordering the bank to fulfil their obligations and pay damages to Mr Umaar.  Despite a period of quiet from Abbey National, it appears that the payment has not been forthcoming and neither has any explanation to the courts or Mr Umaar.

A spokesperson for the bank today confirmed that a cheque would be going to Mr Umaar “as soon as possible”. While the Abbey National seem to have decided to play hard ball with ongoing compensation claims, even when they have been defeated in the courts, this episode may just back fire on them.  There have been some recent mumblings of criticism from the judges in the UK, when the various banks involved have failed to turn up in court, caused long delays and been rather unhelpful – today’s episode will not help their case.

Even though a number of banks have been highlighting a couple of recent rulings in their favour, no legal precedent has yet been confirmed and all potential claimants are still being advised to press ahead with their actions.  Slowly but surely the situation is coming to a head, and we could see a once and for all legal judgement any day now.

To many people in the UK the stock market is nothing more than a rich persons play ground, the place where the city wheelers and dealers make their money, cut each other up and basically leave the rest of us behind, but is this the real story?

Behind that very public face of big bonuses, crazy dealing and a hectic 24/7 lifestyle, the stock market is the most vital component of any economy, the life blood of new business and a massive borrowing facility for the government, to mention just a few areas of importance.  The very public face portrayed in the mass media is something of a sham, and can often hide the real reasons for having a stock market, and the importance to our every day life.

Let us look at the main areas of the stock market and explain exactly how it works :-

Government Funding

Unknown to many, there is an area of the stock market dedicated wholly to the government, offering a way for the authorities to borrow money from investors, in the form of Government Securities.  These investments are as safe as any in the world, because if the country was to go under then we would all be in big trouble.

The government (via the Treasury) borrow billions of pounds a year, in the form over GILTS, which are basically a loan between the authorities and investors, agreeing to pay an interest rate in exchange for the “loan”, and stating a specific repayment date when the capital will be returned.  Even though the authorities receive billions of pounds a year in tax and other payments, very often the timing of these may not coincide with the requirement for immediate funds, so effectively the Treasury are borrowing the funds early, using the future income stream to repay the debt.

New Capital

This is perhaps the public’s main perception of how a stock market should work, raising capital for both new and old businesses perhaps looking to expand, invest in new products, etc.  These stock market offerings normally take the form of shares, although there are also a number debt instruments which companies may use to raise funds.

The share market is the one which hits the headlines, e.g. “Black Monday” when the market fell, or the “Crash” which saw the emergence of a worldwide recession.  These make the headlines, but behind the scenes the stock market has a really important role to play.

Investment

The stock market is basically an arena which allows investors to buy and sell shares in a particular company, whether these are traders (looking to make a quick buck for themselves) or long term investors such as pension funds. 

Pension funds and insurance companies make up the vast majority of the UK stock market investors (and many other markets around the world).  They offer the opportunity for your pension fund to grow through long term investment in the UK economy via a large group of shares, covering all areas of industry.

Conclusion

While many of us may not be aware of it, the stock market actually touches all of our lives every single day of the year.  The importance of the stock market cannot be under estimated, and the vital role which it has to play in both government, business and the lives of investors.

It has been announced today that HM Revenue & Customs (HMRC) have over charged a cool one million people with regards to their tax returns.  A total of £157 million was over paid during the tax year 2006 – 2007, with many of the most vulnerable in society being hit.

As if that was not bad enough they have also announced that £125 million of tax was under paid, due to incorrect demands from HMRC and a breakdown in their processing systems. All in all a net £32 million was demanded in error, but how can this really happen?

The problem seems to have occurred more often when a person has a “complicated” life, i.e. they may have two jobs, they may be personable age, but working, etc.  It seems as though the processes instigated by HMRC have not been robust enough to cope with the varying lifestyle of so many today.  As we all know, the authorities are quick enough to claim back any tax which they are due, but it is a different story claiming back tax which has been over paid.  If a system can actually over charge in error, what chance have we with regards to an automatic reimbursement?

It is therefore essential that you have the correct tax code for your situation, and if your circumstances do change, let the authorities know as soon as possible. Why not check to see if you are paying the correct tax now, at :-

Check Your Tax Code

If you believe that your tax code is incorrect and you have over paid tax in recent years, there is a simple complaints procedure which could result in a substantial return for you.

Historically the UK has been, and continues to be, a hot bed of new business talent with a vast number of new businesses being set up each year, some succeed, some fail and some limp along.  However, one of the main problems which many new businesses experience is under funding.  There are a great number of business people who think that they need to cut down their starting budget to a minimum in order to be successful – this is not always the case.

In order for any business to have a chance of succeeding, the business needs to be fully funded.  True, there is always a need to cut out any surplus costs but there is no way a start up business will stand any chance of succeeding unless it is allowed to grow.  Many business people have been known to approach their banks for funding with a figure which is wholly inadequate and a recipe for disaster. You need to remember that no sensible bank would expect your business to break into profit from day one, a company needs to be nurtured like a young plant – given a firm base, encouraged to grow and watered frequently, with the end product of a blooming flower (or a successful business!).

To under fund your business from day one is a major mistake and drastically reduces your already borderline chances of success.   There are many banks who would not even consider the funding of a new business if they saw that the project was under funded.  Under funding leads to :-

· Less chance of being successful.

· Tighter trading conditions.

· Less breathing space to make the normal mistakes associated with a young business.

· A disheartened owner always fire fighting.

· Probably eventual closure

As strange as it may seem it is always advisable to ask for a little more than you expect when looking to fund a new business.  There are many highs and lows of setting up a new venture, but to experience the highs and the lows, you will need to be around – for that you need to be fully funded!

While the UK has one of the better funded state pensions systems of the world, the government are still expecting major funding issues for the state pension going forward.  There has, and continues to be, a great move towards putting the onus back on the pubic to arrange their own personal pensions for the future, with the intention of taking some pressure of the state system.  Why should we be funding our own pension arrangements as we have all paid our fair share of taxes?

The truth is that the pensions industry have made a number of simple errors over the last decade or so, with regards to the average life expectancy of the UK population. In an industry where even the smallest under calculation can have majors implications, it seems that that the UK population are living longer, which means extra funding requirements for the state pension (as well as personal and company arrangements).

The government have been offering a number of tax incentives of late to set up your own personal pension arrangement, which will run side by side with the state pension.  While some may consider this strange, the fact is that in relative terms the value of the state pension has been falling for some years with annual increases at best in line with inflation.  As the cost of living increases at a higher rate than the state pension, the power of the state pension is continuously eroded.

There are also concerns that the UK may suffer as the EU grows closer and closer, with talk of “bailing out” fellow EU members who are having major problems with their state pension. The Italian pension system for one is currently in disarray with massive under funding implications forecast for the years ahead – we are talking about billions of pounds, which fellow EU members may be expected to contribute to.

The fact is that by the time many of us reach pension age, the value of the state pension will have fallen so much in relative terms that we will need to have our own arrangements in place.  For those in a position to do so, it his highly advisable to seek professional advice as soon as possible.

While the housing market continues to bound along, taking only short breathers before pushing on further, the Bank of England are getting more and more concerned about the state of the UK economy.  Base rates have already been increased to 5.50% in what has been a sustained campaign for the last year, but the consumer does not seem to be taking much notice.

The Bank of England committee will be announcing their decision at 12 o’clock today, although many are already resigned to another increase in rates.  While there had been slim hopes that the property market may have topped last month, recent figures show the sector is still in a very firm upward trend.  Recent news regarding the rate of inflation has also been a little worrying, and these two factors are the main reasons why rates are most likely to rise.

The knock on effect to the already stretched consumer will be a rise in loan rates, credit card rates, etc although there will be some rest bite for those with savings who should see an increase in savings rates.  While it may not yet be raining for many of the UK population, there is no doubt that the storm clouds are gathering over the UK economy. 

The Bank of England have a very tricky situation which they have handled with care so far, but they now seem set to raise the stakes a little.  The committee are obviously keen to avoid any long running recession although it remains to be seen how the market will react to the expected news later today.

Credit cards have become a way of life for the majority of the UK population over he last decade of so, but those who treat them with a lack of respect can often find themselves in trouble.  Credit cards should only really be considered for short term funding arrangements, with the user certain that they can pay the funds back as soon as possible.  However, many have fallen into the trap of multiple cards, with offers for more and more cards dropping through the letter box on a regular basis. 

Is there an alternative to long term credit card debt?

The best credit card users are the ones who pay off their debts every month in full, although this is a rare occurrence with the UK credit card fraternity. The problems can easily count up if you fail to pay off the full amount, but continue to spend on your card.  Unfortunately it is very easy to push your debt up to £100, then £200, then £500 and further.  At some stage you will get to a level where you think another £100 will not make a difference in the long term, but is there an alternative?

For those not in a position to pay off what may have become a large credit card debt, they should be considering a personal loan to pay off and close their credit card accounts.  There are many benefits to this which include :-

· A drastic reduction in interest rate charges.

· A more structured debt management plan.

· Easier financial planning for the month.

· A path away from a life of constant debt and possible bankruptcy!

If you are liquid and have a decent income coming in on a regular basis, the banks will not have any second thoughts about lending you more and more money, increasing your credit card limit, etc.  However, if you bury your head in the sand and ignore an accumulating debt problem, by the time you realise you are in trouble it may be too late.

As soon as you realise that the majority of your income is going on servicing your debts, it is time to act!