Bank of England Disconnected From Reality

The Bank of England, in its latest Quarterly Bulletin, has demonstrated that it is somewhat disconnected from reality and displays a mack of understanding of human nature.

In the bulletin, the Bank warns that “saving appears to be too low”:

“If current households choose not to pass on those gains to later generations, they may be able to spend more and save less. Future generations, however, will need to save more for their retirement or work longer.”

That is all very well, maybe. However the Bank appears to have forgotten that UK interest rates (0.5%) are at the lowest they have been for years.

Add to that the fact that we are being told that we will have to endure years of austerity and, like it or not, people's reaction will be very human; namely to enjoy the good times (ie spend) whilst they still can.

Economic cycles and people's reactions to them are driven by emotions not logic.

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Passing The Buck

The government, in a cost saving measure designed to save around £8M, has instructed the Royal Mint to issue new 5p and 10p coins (which are slightly thicker and made of a cheaper alloy).

However, the cost to the vending machine industry and local councils of updating machines to be able to take the new coins is estimated to be around £80M.

Add in the cost to the public of time wasted fumbling for coins that fit the upgraded machines (old coins won't work), and you have a remarkably unbalanced and inept "saving" measure applied by the government.

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An update on savings and growth

- by New Deal democrat

Early last week January savings and spending were reported. I haven't updated those graphs in awhile, so this is a good opportunity to do so.

To begin with, on a real, inflation adjusted basis, Americans saved more money at the bottom of the Great Recession than at any time since World War 2:



As you can see, some of that savings has been spent to fuel the recovery so far, but most of the accumulated savings - as much as at the end of the 1980-82 recession - is still available.

Amercians' relative newfound frugality can be seen in this update graph of the savings rate as well:



This has been trending sideways for over a year and a half, and from the longer term point of view, is a good thing.

Yesterday I pointed out that job growth in 2010 tracked real GDP growth (red) more closely than real retail sales (blue). Which means that the two series have diverged more than usual, as you can see here:



So, how will the divergeance get resolved? Back in August of last year I began keeping track of the real, inflation adjusted personal savings rate, and updated that view in November. Here is how the relationship between the real personal savings rate (blue) and real GDP (red) stands now:



As I said then, the reason for keeping track of the relationship is that as can be seen in the above graph, a substantial change in the real personal savings rate is mirrored by a similar substantial change in real GDP about 6 to 18 months later. Subtract 2% from that change in real GDP, and you have a reliable prediction of the change in jobs growth and the unemployment rate another 6-12 months after that. The logic of this isn't hard to follow: increased savings serve as the "tinder" that ignites subsequent spending. That spending leads to growth, and then that growth leads to the creation of jobs.

Thus an increase in savings is a "long leading indicator" for employment in a range of 18 to 30 months later. We are now about 21 months past that peak increase in savings, so this relationship predicts further increases in YoY job growth in 2011. As I pointed out back in November, "subsequent GDP increases are generally similar to the precursor real personal savings rate -- which has been above 5% for much of the last 18 months. Which means that an unemployment rate significantly under 9% by the end of 2011 is quite doable."

The dramatic drop in the unemployment rate in the last three months bears that out. Put another way, the high "real personal savings rate" argues that the divergence between real GDP and real retail sales will be resolved towards the higher indicator - which also suggests continued robust jobs growth.

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The Farepak Debacle IV

Those of you with long memories may recall that I wrote several articles about the demise of Farepak (the Christmas hamper business) in 2006.

The wheels of justice in Britain grind slowly and, over fours years later, moves are afoot in the High Court by the Insolvency Service to disqualify the 9 directors of Farepak and its parent from holding a directorship again.

The ex directors intend to fight this action against them.

Farepak had more than 100,000 who (unusually for many British people) actually tried to plan ahead for their Christmas, and put some money away to cover the cost. When Farepak collapsed they lost on their money (on average £400 each).

The Insolvency Service said "the conduct of each director in relation to the relevant company or companies makes him or her unfit to be a director".

Farepak was not regulated by the Financial Services Authority at the time, it was quite outrageous that it acted as a saving bank yet was outwith the control of the FSA!

Its victims received only about 17.5p in the pound from a government-backed response fund set up after the company's collapse.

Last year they heard they would receive a further 15p in the pound after Farepak's joint liquidators, BDO Stoy Hayward, announced that an action against the directors of Farepak had been settled for £4M, with no admission of liability by the directors.

Post Farepak the government finally took action and announced that payments to Christmas Hamper schemes would be ring-fenced, so that savers will be protected from suffering the same fate as the victims of the Farepak collapse.

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Icleand Deal Agreed

Some good news for some of the hapless individuals who placed their life savings offshore in an unprotected environment.

Iceland's prime minister, Geir Haarde, said that an agreement had been reached (a 'common understanding') with EU member states that will see it cover savers' deposits in return for financial assistance, including agreeing on a stabilisation package from the International Monetary Fund (IMF).

The government of Iceland will "cover deposits of insured depositors in the Icesave accounts in accordance with EEA law."

I would express some words of caution here, before people start to pop open the champagne, until the money is back in a UK bank account don't bank on this happening.

As per the PM's website:

"talks between Iceland and several other EU member states, led to a common understanding that will form the basis for further negotiations".

This is not a done deal by any means.

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Pre Funded Pot

Mervyn King, the Governor of the Bank of England, has told the Treasury Select Committee that banks should pre fund a compensation pot that would cover customers' losses in the event of another Northern Rock collapse.

He believes, quite rightly too, that the lack of a 100% guarantee of savers' deposits contributed to the run on the bank last year.

The current scheme is funded by the banks, which pay an annual levy. However, it does not hold enough money to compensate savers in the event that a bank collapses.

The Financial Services Compensation Scheme currently guarantees 100% of the first £35K of savings each person has at a bank.

That of course is not enough given the size of many deposits.

Mr King's suggestion is welcome. However, given the large number of people who have now deposited savings offshore with higher interest banks (eg in Iceland), this guarantee will not cover those in the event of a failure offshore.

It is very likely, given people's naivety about money, that these depositors are blissfully unaware that they are exposed to the collapse of their foreign banks.

That again could have disastrous effects on the economy.

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Deposit Protection

The government, during yesterday's Queen's speech, outlined its plans to bring in legislation to strengthen protection for bank depositors and institutions "in distress". This is in response to the Northern Rock debacle.

However, as with many political promises, no date has been set.

The Treasury issued a statement:

"The government is committed to extensive discussion and consultation before bringing forward legislation in the forthcoming session of parliament." Noting that the government would do nothing until is was "assured that the benefits of the proposed changes exceed the costs".

The reform would have to meet five preconditions set down by the government:

1 It must be clear and provide consumer confidence

2 Transparent on how it would work in the event of another crisis and credible within the wider market

3 Preserve "critical" retail banking services while customers find another provider

4 Maintain the UK's reputation as a financial services centre

5 Protect taxpayers' interests and ensure "appropriate cost sharing"

A consultation exercise will begin next year, therefore don't expect anything in the near future; unless of course there is another Northern Rock waiting in the wings.

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Savings Fall

Research carried out by the Post Office shows that British people are now saving less than they ever did in the last 50 years.

A staggering 25% of people fail to save any money whatsoever; those that do bother to save are doing so for indulgences, such as holidays.

Given the dismal reputation of the financial services industry (arising from eg the endowment scandal, the pensions scandal, excessive interest charges for credit, excessive bank charges, mis-selling of insurance policies etc) it is hardly surprising that people cannot be bothered to save. They simply do not believe that the money will be there for them when they need it.

The financial services industry will need to get its house in order and rebuild its shattered reputation, if it wants people to ever trust it again.

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Savings

Given the recent increases in interest rates, and the expected future increases, people may be forgiven for thinking that savers have not had it so good for sometime.

Some banks claim to be offering savers rates of between 6%-12%.

Unfortunately, when dealing with banks and other financial institutions, the actualite of what they offer very rarely matches their eye catching headlines tempting you to sign up for one of their products.

The Telegraph today looks behind the headlines, and reveals a few ugly truths about some of the banks' offers.

Despite the eye catching rates, the amount of money that people put by to save has fallen to its lowest in almost five decades.

The Office for National Statistics has released data that shows that the savings ratio, the share of incomes that people save, fell to 2.1% in the first quarter of 2007. This is half the previous quarter's level, and the lowest since 1960.

The fall in savings can be blamed on a number of factors:

-Low interest rates offered on savings accounts
-The disparity in rates between savings and loan offers (thus stretching family budgets)
-Low levels of income growth
-Ever rising house prices, forcing people to dip into their savings to be able to afford buy a home
-The tarnished image of the financial services sector as a whole (tarnished by eg bank charges, the endowment scandal and poor customer service)

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Excess Charges Mass Hearing

Today will see a record number of people have their claims for the return of bank overdraft charges dealt with at Leeds Mercantile Court.

Around 200 cases have been scheduled to be heard, though some have been settled at the last minute.

Over the last 12 months there has been a surge in mass litigation, whereby angry bank customers have sued their banks for the return of the charges they have had to pay for having an unauthorised overdraft.

Banks have attempted to settle all the cases against them, rather than contest one before a judge; as they fear a precedent being set.

Were that to happen, all the banks would be forced to go back through their records for the past six years and repay the overdraft charges to every single customer who they have charged in that time.

In order to clear the large number of cases coming before district and county courts, mass hearings have taken place in the past few months at courts in Leeds, London, Guildford and Birmingham, with more to come in the next few weeks.

The banks have refused to say how many people have threatened to sue them, or how much they have paid out.

As I have said before, banks are in the business of making money. Even if a precedent were to be set, and every penny in overdraft charges were to be repaid, the banks would find other means of making money out of their customers (eg current account charges, lower interest rates on savings and higher rates on loans).

The dice are loaded in the banks' favour!

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EU Condems Government Role in Equitable Life Crisis

The EU will today savage the government's handling of the Equitable Life crisis, and its failure to protect Equitable Life policyholders.

Equitable Life had to close to new business in 2000, after it emerged it could not honour its policies; it went on to dramatically cut the value of customers' life savings, leaving many thousands of policyholders in deep financial trouble.

Today's report marks the culmination of an 18 month inquiry by the European parliament in Equitable Life, and will call for government compensation for the many thousands of investors who lost part or all of their savings and pensions when the company ran into trouble.

The report castigates the government's "light touch" approach to regulating the life insurance business, especially Equitable Life, which was seen by the authorities as "too reputable" to run into trouble.

The report notes that the UK's light touch:

"went a step too far and thereby contributed to a weak regulatory environment, which allowed the difficulties at Equitable Life to grow unchecked".

The report then states:

"There have been a significant number of statements to the effect that the UK regulators failed to prevent Equitable Life from steering into its crisis, and therefore failed to protect policyholders in the UK and other member states from suffering financial losses as a direct consequence.

It is also apparent that the UK regulators behaved with undue awe or deference towards Equitable Life, particularly given its long history and hitherto highly reputable status, leading them to consider it as the top pick of the life insurance industry and apparently believed to be too good and too reputable to make mistakes.

In view of the UK government's failure to comply with the requirements of the (EU's) third life directive, and given the absence either of accessible legal redress through the courts or of effective alternative means of redress, the committee firmly believes the UK government is under an obligation to assume responsibility.

The committee therefore strongly recommends the UK government devise and implement an appropriate scheme with a view to compensating Equitable Life policyholders within the UK, Ireland, Germany and elsewhere."

Unfortunately, for the long suffering policyholders, the committee cannot order compensation. However, the report's author, Liberal Democrat MEP Diana Wallis, said:

"For the victims of the Equitable Life failure, the report delivers an analysis of the UK's flawed process of implementing EU law which, combined with the imminent report of the UK parliamentary ombudsman, should arm the victims with powerful findings," she said.

It is absolutely critical to the future of the pension industry and to all of us as savers and people who hope eventually to see our retirement, that there is confidence in this sector. I hope our report will assist that process."

Tory MEP Robert Atkins, an inquiry committee member, is quoted in The Guardian as saying:

"I believe that due to its failure to adequately protect policy holders in accordance with EU legislation, the UK government is obliged to devise an appropriate scheme to ensure full compensation for victims of the debacle.

Having categorically proven that the UK and EU financial redress systems are unsatisfactory and lack the requisite level of security one would expect from the single market, the EU institutions and British government must urgently combine forces to ensure that higher standards of investor protection and security are legally enforced.

This is imperative if people are to be expected to save judiciously for their retirements."

There will also be a report from the UK parliamentary ombudsman, Ann Abraham, on the Equitable collapse. However, as befitting the "speed" of government processes (doubtless to ensure that Equitable has long been forgotten), this report will not be issued until October at the earliest.

Too little too late for the 1 million policyholders affected by the Equitable scandal.

Maybe they should consider launching a class action?

Is it any wonder that people do not bother to save for their retirement?

How can anyone possibly trust the pensions industry, or the government, to look after their money or their future?

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Interest Rates Set To Rise

Yesterday's shock rise in inflation to 3.1% has sent a warning signal to the financial markets that interest rates are sure to rise, in order to try to tame the inflationary tiger.

The rise in inflation forced Mervyn King, Governor of The Bank of England, to write a letter of explanation to Gordon Brown, as its rate was more than 1% higher than the 2% target.

This was the first such letter in almost 10 years.

Mr King blamed the sustained rise in inflation partly on sharp increases in food, electricity and gas prices over the past year, but also on businesses discovering a greater degree of pricing power as the economy continued to grow.

Sterling broke the $2 barrier, for the first time since 1992, in anticipation of the rise in interest rates.

However, before savers rush to celebrate in anticipation of seeing their meagre returns on savings rise; they should be aware that banks are very happy to pass on interest rate rises to borrowers, but are remarkably recalcitrant when passing on benefits to savers.

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The World's Local Bank!

HSBC, which claims to be the "world's local bank", has decided that the concept of "local" is flexible depending on your income.

That at least is the case for the hapless customers of its Poole Canford Cliffs branch.

HSBC have decided that those people that it classifies as non "Premier" are no longer worthy of interacting with staff at its branch in Poole; ie it will ban "face to face" interaction with "poor people".

Why is this?

Seemingly Poole is a wealthy area and HSBC have more than enough wealthy customers, so they don't need to deal with the "riff raff".

HSBC should take note that it's the "little people" that keep many banks going, as they borrow at exorbitant rates of interst and become steadily indebted.

Arrogance comes before a fall.

To find out if you qualify to see a human being at HSBC's Poole branch, take this simple test:

Do you have:

-£50,000 savings?
-or a £200,000 mortgage?
-or a £100,000 mortgage and £75,000 salary?
-or pay £19.95 a month "premier" account fee?

No?

Then Fark Off!

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Hamper Schemes Ring-Fenced

Following on from the collapse of Farepak, the Christmas hamper company, last year the government has finally got its act together.

It has been announced that payments to Christmas Hamper schemes will be ring-fenced, so that savers will be protected from suffering the same fate as the victims of the Farepak collapse.

Consumer minister, Ian McCartney, said that payments to similar schemes should now be placed in separate accounts, run by independent trustees on behalf of the customers.

The money would only be released to pay for the customers' orders for Christmas hampers and vouchers, not for other business activities.

This of course, in any well run business, should have been happening already.

Quote:

"The companies are now working to introduce these accounts over the coming weeks.

We think that effective safeguards of this type will provide the reassurance consumers are looking for in this industry".

This action was in response to one of the recommendations of a review into Christmas hamper savings schemes collapse by Brian Pomeroy, chairman of the Financial Inclusion Taskforce.

Pomeroy has also called for more to be done to offer consumers better choice within the market, and to educate people about the best options available to them.

Quote:

"This is a market which has operated for many years and provides as many as 700,000 families with a useful way of saving.

However it is vital that more is done to protect its customers and ensure genuine choice for those who want to save for Christmas."

The government's response, whilst being welcome, is somewhat late in the day for the victims of Farepak.

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Misleading Insurance Adverts

Those of you who have tried to claim on an insurance policy, only to be disappointed and have your claim rejected by the invocation of the small print, may raise a faint smile at the news that the Financial services Authority (FSA) have rebuked the industry for making misleading claims in their adverts.

The FSA reviewed the press advertisements of 57 insurance firms, and has subsequently warned companies in the home, travel and car insurance markets to stop using saving claims in their advertising that mislead consumers.

The FSA has also threatened regulatory action, after it found that 57% of motor insurance advertisements with savings claims were either unclear or misleading.

The FSA also noted that 25% of home insurance advertisements were misleading.

Vernon Everitt, FSA retail themes director, said:

"Most people rely on some form of insurance to protect them and advertising is a major influence on what they choose to buy. So it must be clear, fair and not misleading, leaving people with a balanced picture of what's on offer.

This work demonstrates that firms in the home, travel and car insurance markets must shape up and ensure that the claims they make don't mislead."

However, Which? Claims that the FSA has not done enough.

Emma Bandey, personal finance campaigner at Which?, said:

"Why is the FSA consistently reluctant to name and shame firms?"

Which? needs to understand the reality of the financial services industry in Britain; it is here to make large sums of money for itself, not to provide a value for money service to its customers.

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Interest Rates Hiked

The Bank of England confounded the financial pundits yesterday, by hiking interest rates by 0.25%.

The base rate now stands at 5.25%.

It goes without saying that those people who have debts, loans and mortgages will feel the negative impacts of this rate hike immediately. However, those people with savings accounts will not feel the positive effects for some time (if at all).

Why is this?

Simple, the banks and loan companies will use the margin between borrowing and savings rates to squeeze every single penny from their hapless customers who hold debts or savings accounts with them.

Remember banks and loan companies are on this earth to make money, not to help people.

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The Farepak Debacle III

The Farepak debacle is a story that simply won't go away, especially in the run up to Christmas.

The rival Christmas savings specialist Park Group Plc, which now that Farepak has collapsed is the UK's largest Christmas savings club, is claiming that they could have saved Farepak from collapse.

Managing Director, Chris Houghton, is quoted as saying:

"We made four (approaches) in 18 months. All at different times with different prices. We felt we'd made full offers for the business, and for some reason they did not want to take it."

Adding:

"We were bending over backwards to try to avoid the situation we've got now, but it ended up going into administration before we were able to get it done."

However, this claim is disputed; a spokesman for HBOS, bankers to Farepak's parent company European Home Retail (EHR) Plc, are claiming that EHR received no serious offers for the business.

Quote:

"The truth is that no realistic, viable deal was ever tabled.

If it had, EHR is a listed company it would have to be a matter of public record."

All very well, but none of this helps the victims of Farepak's collapse.

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The Farepak Debacle II

A very small measure of good news has been delivered to the hapless victims of the Farepak collapse. Roy Martin QC, one of Scotland's leading lawyers, is to represent Farepak victims for free in their fight to recover their money.

Roy Martin QC is dean of the Faculty of Advocates, and has agreed to waive his £5K per day fee to take up the case of the Farepak victims.

He will meet with campaigner Louise McDade, of the Farepak Victims Committee, to see if Farepak's victims have any grounds for legal action.

Mr Martin will examine the case on behalf of the 150,000 victims across the UK who lost £45M when Farepak's parent company, European Home Retail, went bust in October.

In other news The Office of Fair Trading and the Financial Services Authority are considering whether to introduce new regulations for the industry after the Farepak collapse, I would venture to suggest that this seems to be a tad late for the Farepak victims.

Meanwhile Park Group, the largest Christmas savings club in the UK, has unveiled measures to ring-fence £210M of savers' cash; in an attempt to maintain confidence following the collapse of Farepak (which was in fact a larger company).

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