Investor confidence has hit new lows as the financial sector is in turmoil. Is saving the smart option? How do you ensure your assets are safe? Are falling markets providing bargain opportunities for the savvy investor?
In a special live online Q&A at 4pm BST Tuesday, Matthew Vincent, FT Money editor, shared his view on the effects of the financial crisis on savers, mortgage holders, creditors and pensioners, and answered your questions on investment in the turbulent times.
For more information about Icelandic savings, see Q&A: Are my Icelandic savings safe?
Matthew, if money is borrowed from the government and swapped for shares how might this dilute existing shares and more importantly how will it be possible to value RBS?
Matthew Vincent: This is the unanswered question that has sent Royal Bank of Scotland shares down 39.2 per cent to 90p today. If a government capital injection is provided in return for preference shares and warrants on ordinary shares - as has been suggested but denied by Royal Bank of Scotland today - then there will be dilution of existing shareholders. Cazenove tried to quantify it this morning, but could only estimate how such a swap might work. All the brokers I spoke to today agree that dilution would be inevitable, but could not put a number on the impact for shareholders. So, in the absence of concrete information, the market has made its best guess. The general consensus among analysts is that if you still haven’t sold your Royal Bank of Scotland shares, they are now a hold for some kind of recovery - but with the risk of dilution remaining.
Is this the end of capitalism as we know it and should I pack tinned goods and head for the hills?
Dave Throg, London
Matthew Vincent: No, it just feels like the end of capitalism as we know it! Many analysts and fund managers make the point that there are very few people still alive who have lived, worked, regulated, or governed through any comparable period in financial history - and this makes it difficult to assess the value of assets or the extent of the crisis. What they all agree on - on equity and credit markets - is that sentiment is now the only driving force, and prices are now moving with little reference to “fundamental” values. So until sentiment improves, investors may wish to sit on the sidelines with a tin opener - but don’t forget markets ability to recover fast, as was the case in the mid 1970s.
What do you think about the safety/future of money market funds going forward?
Matthew Vincent: Investors in money-market funds need to be cautious, as not all money market funds are the same, and there is a different compensation scheme for investment funds.
Some money market funds invest in government bonds, certificates of deposit or short-term company debt, with the aim of returning your investment in full with an extra bonus, or yield, on top, although the returns are not guaranteed. Investor confidence in money market funds like these had been dented since the US Reserve Primary Fund could not give investors a full return on their money because of its exposure to Lehman Brothers debt. They are often referred to as “cash plus” funds, but advisers warn that they take more risk – by investing in longer-dated instruments, for example.
Other money market funds spread their investments over a large number of corporations – or choose not to invest in company debt at all - to reduce credit risk. Compensation for investment funds is determined by the Financial Services Compensation Scheme in situations where you have lost money because of your dealings with a firm. For investment claims, the compensation paid tries to take account of the financial position you would have been in had you not invested - so it is not precise.
Santander now owns a substantial chunk of the UK’s banking sector. Is that a good thing? Can we be assured that our deposits are in safe hands? What, if any, are Santander’s exposures to the Spanish property market?
Rod Ellis, Prague
Matthew Vincent: Santander is considered to be better capitalised than many UK banking groups, as it is is relatively unexposed to subprime lending and has a strong retail deposit base. So in the sense that it has the confidence of savers and shareholders, that is ”a good thing”.
If you still have concerns - and I should stress that no savings analysts I’ve spoken to do - then you can be 100 per cent assured of your deposits by spreading them around. Remember that Bradford & Bingley , Abbey and Cahoot, the internet bank, are now all part of Santander and all fall under the same deposit-taking licence so you will only have the new maximum of £50,000 compensation for deposits held with all three. So if you want peace of mind, keep no more than £50,000 with these banks. However, Alliance & Leicester is to retain its own deposit taking licence under the Santander umbrella, so it will provide another £50,000 of compensation protection.
I have recently transferred my ISA money from Natwest to Icesafe. So recent that I have not even had my first statement - how best to go about getting my money out?
Ishveen Jolly, London
Matthew Vincent: It depends on how recently you mean. Icesave today admitted that not all transactions carried out in recent days may have been processed before was put into receivership. For example, savers who tried to withdraw cash before the ban on withdrawals should receive it after 4 working days but Landsbanki says Icesave has been processing transactions on a case by case basis, which suggests not all withdrawals will be paid.
The same may apply to deposits - and cash Isa transfers can take weeks to process (the new guideline is 23 working days). So I would suggest checking with Natwest, to see if the transfer has been effected. If it has, await the letter from the Financial Services Compensation Scheme explaining the claims process.
Wouldn’t it be a relatively simple matter for the FSA to provide 100 per cent cover to retail investors for a fee? This could be paid for by way of reduced interest rate, for example. Without this, those wishing to deal shares via nominee accounts, those saving for or selling houses etc are put at risk and forced to seek safety in National Savings vehicles, denying liquid funds to more productive lenders and earning them less interest.
Dead Ringa, London
Matthew Vincent: This is an interesting idea - but you’ve identified the scheme that comes closest to providing your “100 per cent cover for a fee”: National Savings & Investments (NS&I). Here the fee is, in effect, a lower rate of interest.
Last week, for example, NS&I’s Easy Access Savings Account was paying tiered rates of as little as 1.85 per cent on £100 up to 4.4 per cent on £50,000+, while the Bank of Ireland backed Post Office Instant Saver was paying 5.75 per cent on £500+ with 6 free withdrawals a year, and the government backed Northern Rock’s instant access Branch Saver was paying 4.9 per cent on £2,500+. And today, demand for guaranteed accounts has seen NS&I cut the interest rates on some of its variable savings offers by up to 0.20 per cent again, and Northern Rock close another account to new customers. But, in the absence of a 100 per cent guarantee elsewhere in the UK, they remain the best homes for property deposits or other large sums.
I’ve always agreed with the idea that consistent investment on a monthly basis (into funds) makes sense because as markets fall you get more units of a fund and vice versa. Given the economic outlook it seems that many markets may continue, notwithstanding swings, to fall in the coming years. Am I therefore just throwing good money after bad? Should I just leave new investments in cash?
Matthew Vincent: Investment advisers generally agree that regular investments do make sense. Drip feeding regular savings into equity investments, rather than committing a lump sum, has been shown by countless academic studies to produce the best long-term returns. The effect of buying more units or shares when prices are low, which then maximise your upside when prices recover, is known as “pound cost averaging” and was being recommended by several brokers and advisers last week. Few commentators believe that the market falls are over - even Anthony Bolton said it was “hazardous” to call a low this week - but many fundamental and technical analysts believe the falls will give way to a protected recovery at some point next year.
I have 32k invested in a savings bond with Icesave. Just how screwed am I?
Matt Griffith, London
Matthew Vincent: Landsbanki, the Icelandic Bank that operates under the Icesave brand in the UK has been put into receivership by the Icelandic government. So Icesave is not allowing UK savers withdraw their money at present, and has not said when the ban will be lifted. Theoretically, though, your £32,000 is protected because Icesave operates under the “European passport scheme”, where account holders have to go to the country of origin to claim compensation first, but are topped up by the UK Financial Services Compensation Scheme (FSCS) to a total of £50,000.
However, the Icelandic and UK compensation schemes have not yet been triggered as Landsbanki is only in receivership, not liquidation. The UK’s Financial Services Authority says it expects the Icelandic authorities to put the company into insolvency, but you will have to wait until that happens to start a claim. One concern for UK investors is that the Icelandic Financial Supervisory Authority (IFSA) has only £88m in its compensation scheme, and may be liable for over £4bn. The IFSA says it will go to the Icelandic Central Bank for additional funds, but the amounts available are unclear. The FSCS will handle all UK claims and will write to customers within a week of Lansdbanki going into liquidation.
How safe are different business brands under a group’s umbrella? RBS has RBS, Natwest, Coutts, etc. Where do savings risk stand here? Where do loans risk stand here too? For example if one has a personal loan but also savings, will the savings get swallowed and the loan remain payable? Does the same apply for back to back loans? Finally, where do you see high street bank risk being highlighted? In share price or CDS spread? Thanks.
Hubert de Froberville
Matthew Vincent: This new Financial Services Compensation Scheme limit of £50,000 – increased from £35,000 – applies to the total of your deposits with any single institution, regardless of how many accounts you hold or whether you are a single or joint account holder. A single institution is defined as a banking group or a holder of a deposit-taking licence. In the case of Royal Bank of Scotland Group, NatWest and Coutts have separate deposit taking licences. So, you have £50,000-worth of deposit protection with all three.
For borrowers, there is no “loan risk” as such - in the event of part nationalisation or a government rescue, loans or mortgages would continue to be repaid - as has been the case with Northern Rock and Bradford & Bingley. The only risk is that lending criteria may be tightened, making it difficult to renew a borrowing facility or remortgage. In cases where you have a loan and savings with a failed bank, amounts owed to the failed firm (for example, loans, mortgage or credit card debts) will be taken into account before any compensation is paid. In effect, the amount of your deposits may be “offset” against any amounts you owe. If that offset is applied, and if your borrowings exceeded your savings, there would be no overall claim against the failed firm, and you would not be entitled to any compensation.
My wife and I have all our savings in RBS. Should we withdraw it and open an account with say HSBC. Also how much does the government guarantee in the event the RBS defaults?
Tom Brandon, Saudi Arabia
Matthew Vincent: Royal Bank of Scotland has denied seeking funds from the government, and banking analysts say that government considers the bank “too big to fail” – so they suggest that if even there were any subsequent injection of capital and part-nationalisation all customers would be safeguarded, as was the case with Bradford & Bingley.
As of Tuesday, the first £50,000 of your deposits with any one institution is protected by the Financial Services Compensation Scheme (FSCS) in the event of a bank failure. This new compensation limit of £50,000 – increased from £35,000 – applies to the total of your deposits with any single institution, regardless of how many accounts you hold or whether you are a single or joint account holder. So if you and your wife have a joint accounts, you will be eligible to claim up to £100,000. A single institution is defined as a banking group or a holder of a deposit-taking licence. Royal Bank of Scotland and NatWest, for example, have their own deposit-taking licences, so you are covered up to £50,000 with both.