While the subject of the repayment of bank charges has gone quiet for some time, as we await the outcome of a test case later this year, HBOS are to be called to account later this week.  They have refused to fulfil earlier court orders instructing them to repay a total of £50,000 to 11 former customers.  A management company representing the 11 customers have applied for a wind-up order against HBOS for non-payment, but the bank have applied for an injunction.

Friday will see the bank forced to explain why they have ignored an earlier court order, and only paid back approximately £20,000 of the £50,000 awards.  The bank claim that they want the balance to be deferred until the test case later this year, but it is not clear what basis they have for doing this. 

This has further infuriated the millions of customers who are looking for repayment of their excessive charges, and in particular those who have received favourable rulings but not received the full settlement.  Quite how the courts will deal with these latest developments is unsure, but the banking industry are pulling out all of the stops to cut off the stream of repayments due to customers.

Even though Friday’s ruling will have no bearing upon the test case later in the year, it will interesting to see how the authorities react to the blatant disregard for earlier rulings.  Surely the banks will not be allowed to pick and choose which rulings they abide by?

As we approach the Christmas period, many people around the world will be chasing up their Christmas clubs to ensure their vouchers and money are ready for the Christmas rush.  These are people who having been saving up for nearly 12 months in order to give their families a Christmas which they will remember.  But are Christmas savings clubs safe?

Many people will remember the Farepak disaster a couple of years ago, where many many people lost the majority of their Christmas savings when the company went under.  Unknown to the many savers, their money was not ring-fenced from the company, and when the company went under the receivers claimed these funds as assets of the Group.  Many savers lost thousands and thousands of pounds, with Christmas cancelled in a number of households.

While the rules in the UK, and other countries,. have been tightened after the Farepak collapse, it is still essential that you know who is looking after your money, and what degree of protection you have.  There are many legal issues to contend with, whereby unless ring fenced from the company in specific bank accounts, your money can be claimed back by the receivers in the event of collapse.  It is therefore essential that you know how the savings club is set-up, and what would happen in the event of collapse.

It is unfortunate but there are good solid savings clubs out there who have seen their business reduced by the Farepak chapter.  Many people are turning to good old fashioned savings bank accounts, and while they have ready access to the money, many are turning a blind eye until the Christmas period.

The choice is still there, and there are Companies out there who will look after your money properly, and ensure that you get the Christmas you always wanted.

It has emerged since the crash of Northern Rock that many UK financial establishments are actually turning down new business which they would normally have taken on at a seconds notice.  They seem to be under strict orders to keep assets as fully intact as possible, and not open themselves up to over stretching, such as in the case of Northern Rock.  So when will this change?

The credit crunch has not only effected the borrowing financials, it has effected the lending companies who are not as keen to let go of their money at the moment. Unless there is as near to zero risk as possible they have been seriously considering their positions, which will ultimately improve their bad debt situations but possibly reduce their short term profitability.

Those who thought that Northern Rock marked a turning point in the crisis are set to be sorely mistaken, with many analysts forecasting further sector difficulties in the short to medium term - indeed there are even reports that the industry may well let Northern Rock “die a sad death”.  None have been forthcoming to bail the company out, and the longer this goes on the less chance of the company making any kind of revival. 

There is even talk of the authorities stepping in again to finance the company, but this will never happen as that would mean crossing the line to the free market.  Sadly the days of Northern Rock are numbered, unless a bidder comes up very soon!

The credit crunch is set to claim more scalps in the States, with rumours that some of the big players may be experiencing difficulties.  Until the credit crunch has run its course, and no amount of State aid or extra liquidity will effect this, the system will still be on red alert for difficult situations.

If you have ever been to college, university or some other form of further education, you will no doubt be aware that the banks have a tendency to chase students to open accounts, offering free overdrafts, interest deferred loans and more.  Why do they do this, and who really benefits?
 
The banking industry see those in further education as potential customers for the future, and the sooner they grab you the better.  The average student will probably be forced to get into some form of debt in their further education years, thus many will not really be able to move banks once they have signed up.  This gives the bank in question a big hold over you for a potentially long time, and they can make a substantial amount of money out of you while you struggle to pay off your debts!
 
So who is the real benefactor of this pursuit of students?
 
In all honesty, the initial “investment” by the banks can make life easier for a student in their years of further education, but there is no such thing a free lunch in this world - you will pay for it some time!
 
The banks have worked out how much they could make off you, the chances that you may be successful in the business world and they want to keep you sweet from day one.  While it is very easy to get into debt, it can be very very difficult to get out of it, and you will incur masses of interest and charges - just what the banks like!
 
But why don’t people just move banks when they get into employment?
 
The main reason why people do not  change banks is because of laziness, and the fear of more and more paperwork, potential problems with direct debits, etc.  While many do not realise that a new bank will sort all of your direct debts, etc for you, the fear factor still remains.  That in a nut shell is why the banks make a big play for students - future income!

For many years now we have been bombarded with the fact that the majority of us do not “pay” for our banking, and at some stage “free” banking is set to disappear.  Well, the truth is that there is no such thing as free banking, and all that will change is the fact that you will be charged more by the banks!

You Don’t Pay A Fee, So Its Free?

No.

When you deposit you money into your current account, you will receive interest which will be well below the base rate at the time, with some banks offering you only a tiny amount of interest - often just enough to say “we pay interest on our current accounts”. 

Charge one : the banks will either be lending your money out at higher interest rates, or placing it on the money markets over night and receiving a much better rate than they are giving you.

Many banks will now try to push you towards online banking, with a number of them introducing fees for paper statements.  This saves them money sending statements to you, and pushes you towards their websites where you will be able to sort out your own queries. 

Charge two : Paying for statements and logging on to the internet (a cost to you).

When you take out a mortgage or some kind of loan, many banks will charge a set-up fee.  This fee is just a bonus for the banks as there is no reason to charge this fee.  They are being paid for their time via the profit when you take out the mortgage or loan, and have the cheek to charge you on top.

Charge three : Set-up fees.

These are just a few of examples of where “free” banking is at the moment, and when you consider that they are looking to introduce monthly charges, you can maybe understand why the banks are making so much money!

Now that a degree of calm has returned to financial markets, we have the traditional witch hunt, looking for someone to blame for the whole situation.  In reality there is no one person or organisation to blame, but quite a few financial experts are pointing the finger at the regulators and the government.  The bottom line is, were the government right to effectively bail out Northern Rock with a loan, and guaranteeing customer deposits?

Apparently it has just come to light that the authorities were warned some 4 weeks ago that Northern Rock would struggle if the credit crunch hit the UK, and while plans were suggested to assist the company (and support the overall sector to some extent), the parties involved could not decide which route to take.  Did they bail out the company with an early crisis loan? Did they arrange a takeover by another UK financial bank? Or did they let market forces take their course?

In the end the authorities did nothing, until finally they were forced to come in and bail the company out, as well as guaranteeing customer deposits.  While there is major criticism of the regulator for the speed with which they acted, there is also great concern about the role of the government. Were they right to guarantee savers deposits? Does this not give the green light for others in the sector to instigate risky business models? Will the consumer now expect to be bailed out every time a bank is in trouble?

While it may well give the green light to other financial companies to instigate higher risk business strategies, it was also a necessity in order to steady the banking sector as a whole.  If Northern Rock had fallen, the knock on effect would have been like an earth quake in the sector. Speculators would have been looking for the next victim, and slowly but surely some of the smaller players would have been demolished by a wave of withdrawals, etc.

There is no right and wrong in these situations, as the landscape can change from day to day, but neither the government nor the regulators could ever be accused of acting on impulse!

While the announcement today that the UK Treasury will guarantee all Northern Rock customer deposits has been fairly well received - probably a case of better late than never - it does beg the question, why have the government changed their policy? Are they aware of more bad news in the sector?

Properties bought for cash

As we have mentioned on some of our earlier posts, the main component of any financial market is confidence. As we are seeing now, confidence is easy to smash but not so easy to build back up over a short space of time. The move by the Treasury today, which effectively guarantees that all Northern Rock customer deposits are safe, surprised many in the market due in the main to the historic role of the authorities not to become directly involved in free market business.

Many in the markets are asking why they performed such a major u-turn, after only hours early indicating that they were not prepared to step in above and beyond the current compensation arrangements available. Do they know something that will rock the sector again? Are they so desperate to restore confidence that this is the only action they can take?

We have regularly seen authorities in the US use such a tactic to try and soften the blow of future shocks and disappointments, but this is the first time we would have seen such action in the UK, if this is the case. No matter how hard the government try, they are not able to convince the financial markets that the worst is over. Such major changes in policy can also upset markets, with suspicion and a lack of direction being pushed to the forefront.

As the UK banking turmoil continues, with rumours that more banks may be in trouble and mortgage rates are about to rise, many are asking the question. “Is our money really safe?”.  The short answer to that is yes!

While the recent turmoil has been brought about by events elsewhere in the world, which have had a knock on effect to confidence and the financial position of some UK banks, it is a situation which will not last for ever.  However, if one of the major UK banks were to close then this would send shock waves through the whole system, and have disastrous consequences for the sector.  This is something which neither the Bank of England nor the other major banks would allow to happen..

Some may remember Barings Bank and what happens there, but this is totally different as that was brought on by a rogue trader and slack financial controls.  Northern Rock, no matter what people may say, are actually a victim of circumstance, although it is highly unlikely that they will remain an independent company for much longer.

The financial system is all about confidence and this is something which will and does effect all in the sector.  The possibility of one of the major banks going out of business would push many customers to retain their savings “under the bed”, and a return to a fear of the sector - this will just not happen.  If the worst ever did happen then there are various compensation systems in place whereby victims would be covered for over 90% of their savings.

The Northern Rock saga is just the beginning of the situation and more banks will almost certainly get dragged into the situation.  While the Bank of England have taken the positive step of offering assistance to the Northern Rock, the market and the lack of confidence is a larger issue. The Bank of England can influence the markets in conjunction with there worldwide banking partners, but there will be a natural process of recovery as participants come to terms with what is happening, and confidence slowly begins to rise in due course.

The UK credit crunch has now taken hold of its first major UK causality, with Northern Rock forced to call on the Bank of England’s “lender of last resort” system, to bail out their business.  While the situation is only short term, it has caused major upset with the Bank’s customers with over £1 billion of deposits withdrawn over the last couple of days.  So how did Northern Rock get into this mess, and is it terminal?

The problem with the Northern Rock business model is the fact that they lend 75% of all mortgage amounts from the inter bank market - effectively borrowing money from their banking counter-parts.  This has left them more wide open than most to the recent disappearance of commercial lenders, in light of concerns within the US financial markets.  As lenders have disappeared from the market, Northern Rock have been pushed into a corner whereby they have had to call on the Bank of England to allow them to agree future mortgages.  So how much will this cost Northern Rock?

While the loan situation is purely a technical phase, the Bank are being charged an enormous 6.75% by the Bank of England, which will reduce their profit margin on future mortgages.  Last year the group made profits of some £500 million, so you can see from their history that they are not a small bank.  Unfortunately, while the turmoil continues and customers clamour to withdraw their funds from the bank, their reputation is being ruined and when the situation calms down they will almost certainly become part of a larger group, with the  likes of Lloyds TSB being mentioned as a possible suitor.

While many may not have been aware of the internal credit market before the recent downturn, it does demonstrate how events in another part of the world can result in the collapse of confidence, and even businesses, in another area of the world.   The financial markets around the world are so entwined that the knock on effects can last for some time, and have disastrous effects.

Northern Rock may be the first major UK bank to hit trouble, but there are rumours that a whole host of others are finding life tough.  This is not the last of the credit crunch problems in the UK, you can be sure of that!

While there are many ways in which the internet has helped the everyday consumer, not all has gone to plan with regards to customer services available - especially in the financial industry.  There are many bank customers from years gone by who were very friendly with their local bank manager, but are they as friendly now? Do they have the same characteristics? Have you actually seen your bank manager?

The chances are that if you opened up an account in the last 10 years you have probably never met your local branch manager, and your relationship with them will be nothing like that of years gone by.  In the 1980s and before, the local bank branch was often the centre of many rural and town communities, everyone seemed to know everyone else and there was always somebody to answer your questions - times have certainly changed!

It is basically since the internet began to play a part in financial services that we have seen the demise of the bank manager / customer relationship.  The old style managers have been replaced by pen pushing figure heads, who do not have any actual control over what they can authorise - everything is now computer driven and cleared by “Head Office”.  Customers seem to just be numbers and there is no real effort to get to “know you customer”.

Costs have been cut to the bare bones, which has instigated the demise of many bank branches, and the heavy promotion of telephone and internet banking.  The banks of today are run purely on financial formulas, dictating how many of a certain product they can sell, what the preferred mix is and issuing targets, targets, targets - so now you may understand why they ship you in and ship you out as soon as possible.

It is looking more likely that if you want to see a representative of your local bank, not necessarily someone who will know you, you are going to have to pay a fee in the future.  The bank manager / customer relationship has gone for good and is highly unlikely to return in any form approaching that of the 1980s and before.

The internet has been excellent for some things, but for others, well……..