2011 review: Banking and savings

The regulator cracked down on high-street banks in 2011, imposing a then-record £7.7m fine on Barclays in January before topping that figure with a £10.5m penalty for HSBC in December.

In between these two sanctions from the Financial Services Authority came the long-awaited report from Sir John Vickers laying out new rules to make Britain’s banks safer places to deposit money, and Virgin’s successful bid for Northern Rock – taking the bank back into the private sector, four years after its near-collapse.

But with Europe’s crisis-hit financial institutions casting a shadow over the UK banking sector, with RBS and Lloyds still under state control, and with credit agencies downgrading even UK building societies, the outlook for savers and customers remains far from clear.

Shareholders have delivered their verdict, though: marking down UK bank shares by more than 25 per cent over the year.

Midway through 2011, there had been hopes that at least one part-nationalised bank might put its recent troubles behind it, compensate wronged customers and make a fresh start.

When new Lloyds chief executive António Horta-Osório declared that Lloyds would make a £3.2bn provision to settle claims for mis-sold loan insurance (PPI), he elicited praise for breaking with the bank’s past, and breaking ranks with his peers.

But, by early November, Horta-Osório had succumbed to stress – taking a leave of absence that will run until January 9 next year – and taking Lloyds shares down with him.

However, the difficulties in running a UK retail bank weren’t enough to deter Sir Richard Branson from making a successful bid for Northern Rock in the same month, in a deal largely paid for by US financier Wilbur Ross.

While the appearance of the red and white Virgin Money brand on the high street is not expected to bring market-beating deals for customers, the publicity is expected to make competitors devise ways to lure savers – beyond the “bait and switch” shortlived savings rates currently employed.

Banks’ need for more capital to meet regulatory requirements is also expected to increase competition for cash deposits – and has already led to innovations such as Santander’s new upfront interest bond.

But the rivalry – which intensified this year when the government’s savings arm National Savings & Investments reissued its guaranteed index-linked certificates – is also making it more difficult for new banks to gain a foothold.

Metro Bank, a London-only operation that promised a return to the traditional approach of simple products and personable staff, appears to have severely underestimated the public’s appetite for competitive rates. In November, it revealed that it had advanced just 100 mortgages in 15 months.

With the Bank of England base rate stuck at a record low of half a percentage point, and returns on cash accounts failing to keep up with inflation, savers have increasingly turned to more complex, and risky, ways to earn income. A number of the inflation-linked savings products offered on the high street are now structured deposits, reliant on other counterparty banks.

Bank customers are also having to pay more just to hold cash. This year, for the first time, bank accounts that charge a monthly fee outnumbered free accounts. Free banking might not yet be a thing of the past, but it’s becoming the exception not the rule.