Guarantees propel Northern Rock to top of tables

Look at the best-buy tables for savings accounts and Northern Rock features prominently. The bank is offering chart-topping rates for one-year bonds and accounts for the over-50s, as well as competitive deals on easy access savings and tax-efficient Isas. The icing on the cake is that any investment in these accounts is underpinned by a cast-iron government guarantee.

The chancellor announced plans to nationalise Northern Rock last weekend. This means any money invested in the bank will be safeguarded by the Treasury – a guarantee above that offered by the Financial Services Compensation Scheme.

According to Moneysupermarket.com, the price comparison website, interest in Northern Rock’s easy access saving account has more than doubled since Sunday.

“In terms of savings, Northern Rock does have a competitive advantage and is in a very positive position,” says Kevin Mountford head of savings at Moneysupermarket.com. “It’s a no-brainer [for savers] at the moment.”

However, a government-run bank that is allowed to compete openly brings problems for the wider market. The 100 per cent guarantee provided by Northern Rock’s accounts gives the group an unfair edge over other savings providers, who can only protect up to £35,000 per customer.

Banks and building societies have been quick to express their concern.

“We would clearly be unhappy if the business plan that Ron Sandler [chairman of Northern Rock] puts together is centred around strong competition in the market, bearing in mind the fact that they are being subsidised,” says John Goodfellow, chief executive of Skipton Building Society.

Another industry source says everything depends on the plan that Northern Rock sets out. “If the bank is going to be significantly reduced in size, then the industry will not be unduly concerned,” he says. “But if it is going to be re-energised and out there aggressively competing, then that would be a different matter.”

Already, Northern Rock has pulled away from the mortgage market. It has written to existing customers coming to the end of two or three-year cheap deals to warn them it will not be able to offer ongoing competitive rates. It has also just withdrawn 125 per cent mortgages, following similar announcements this week from Alliance & Leicester, Coventry Building Society and Abbey.

Mortgage brokers do not expect Northern Rock to attract much new business in the coming months and say the group has been trying to offload existing customers.

Northern Rock’s new mortgage rates are extremely uncompetitive. The cheapest two-year fixed rate offered by the bank is 6.99 per cent and its cheapest two-year tracker is 7.04 per cent, according to Charcol, the mortgage broker. Other lenders are offering two-year fixed rates for as low as 4.98 per cent and two-year trackers from 4.99 per cent, although these tend to carry high fees.

Northern Rock’s savings rates look considerably more attractive. According to Moneyfacts.co.uk, Northern Rock offers the best rate for saving accounts aimed at the over- 50s. Its Silver Savings Online account is paying 6.49 per cent, compared with similar accounts from the Leeds and Coventry building societies, which are paying 6.2 per cent and 6.1 per cent respectively.

Moneyfacts says Northern Rock’s over-50s account had received more than five times as many applicants in the past month as any similar best-buy accounts.

Northern Rock is also offering the best rate – 6.35 per cent – on a one-year fixed bond, according to Moneysupermarket.com, while its instant access saving account is paying 6.49 per cent, only marginally less than the best offering on the market, of 6.55 per cent.

It looks unlikely that these rates will be available for much longer. Northern Rock says it plans to continue to rein back on lending, while attracting retail funds. But the Treasury is under pressure from the banking industry to ensure that Northern Rock cannot use the government guarantee to gain a competitive edge.

“If a pattern emerges of Northern Rock offering eye-watering savings deals on a consistent basis there would be cause for concern,” says the industry source.

The British Bankers’ Association (BBA) and the Building Society Association have made it clear that the present situation is unacceptable. The BBA will be consulting with the Treasury over the next 10 days with a view to establishing a “fair and competitive” market.

“We need to ensure that we do not have a situation in which the government guarantee for deposits distorts the market, thus making offerings from Northern Rock more attractive,” says Angela Knight, BBA chief executive.

Northern Rock is due to present its business plan to the European Commission in around three weeks’ time. It has to show exactly how it proposes to be fair and competitive.

“We need some sensible trade-offs between what it can offer in terms of rates and the fact that it has the government guarantee,” says Knight.

She believed there were a number of possible options.

The government’s savings arm, National Savings, restricts the amount people can invest with it, and is also bound by the fact that the total cost of providing its saving products cannot exceed the cost of gilts – government-backed bonds.

Northern Rock accounts are unlikely to be linked to the price of gilts, but a similar framework could position the bank somewhere between National Savings and an independent commercial bank. “It is not beyond ability to strike a similar balance [to National Savings] for Northern Rock,” says Knight. She points out that there has already been some movement – for example in removing higher loan-to-value mortgages – and that “further changes will no doubt need to be made quite quickly”.

It is unknown as yet whether Northern Rock will be able to offer rates that appear in best-buy tables. It is unlikely that the bank will be allowed to provide the best rate on the market for a particular account. “I cannot believe the Rock will be out there competing with the best for new business,” says the industry source.