Personal Finance Industry Insight March 2007

Welcome to the March 'Personal Finance Industry Insight' newsletter from uSwitch.com.

In this edition, we will provide an overview of industry activity from product launches and developments, to regulatory changes, industry announcements and market trends.

We have also included a monthly 'what to expect' commentary from resident personal finance experts at uSwitch.com.

Predictions The annual round of banking results has kicked off and all to date have followed a similar pattern, with growing profits but also growing bad debts for the big banks.

We predict that bad debt (write-offs) will continue to be a growing problem throughout 2007 and UK banks will have to enforce more stringent rules in a bid to turn this round.

The announcements by first direct to levy a monthly banking fee of GBP10 and Citibank to automatically upgrade their customers to a fee-paying account, shows that banks are already making headway in the direction of charging fees, to the extent that the longevity of free banking is certainly in the frame.

We predict that the OFT's impending investigation into default charges on current accounts could signal the end of free banking.

In our previous Monthly Commentary we pointed to the fact that the sub-6% personal loan market could soon end.

However, as more providers increase their loan rate, i.e Northern Rock and AA (these providers were key players in the sub-6% market in 2006), uSwitch.com predicts not only the end of the sub 6% market but also the end of low rate unsecured loans altogether as the looming Competition Commission PPI investigation continues.

Nick White, Director of Personal Finance, at independent price comparison and switching website, uSwitch.com, comments: "The big banks are really under the spotlight right now".

"Those who have announced their 2006 results to date have reported significant, and record, profit levels, yet the level of bad debts continues to be a dominant feature across the board.

We have also seen in recent weeks a consumer backlash, with many reclaiming default fees they have been charged over the years by their banks".

"As we eagerly await the outcome of the OFT's investigation into banking default fees, we are in no doubt that whatever the outcome - whether the OFT sets a cap on charges immediately or decides to take a bank to court for a test case on the legality of charges - the end of free banking is near".

""As predicted earlier this year, following the OFT's cap on credit card default fees, lenders have quickly moved to find new and 'innovative' ways to recoup lost profits back from their customers.

Lloyds TSB has said that it will start to charge some inactive customers and MBNA will start charging people who are in credit on their accounts.

"Finally - with new cars arriving on the forecourts at the start of this month, it is essential that consumers don't waste the predicted sum of GBP228 million by signing up to the finance deals offered by the dealers, but look around for the most competitive loans on the market".

"Following what we saw last year, I would expect to see around a fifth of new cars bought this year, purchased in the month of March alone." Product changes and developments Personal loans The AA has increased its loan rate from 6% to 6.5% Northern Rock also further increased its loan rate from 6.1% to 6.4%.

It was previously in all the best buy tables for sub-6% loans.

Credit cards Barclays dropped its purchase APR to 14.9% on both its Barclaycard Charity and Premiership cards.

and Abbey increased its balance transfer fee from 2% of the balance to 2.5%.

Lloyds TSB has imposed a fee of GBP35 onto its credit card when a consumer does not actively use their card.

MBNA has also imposed a GBP10 fine if customers leave a positive balance on their credit card.

Current accounts Abbey has increased the overdraft rate on its current account to 10.9% (from 9.9%) and increased credit interest by 0.3%.

First Direct has imposed a GBP10 monthly fee on all its standard current accounts unless they deposit or keep an average monthly balance of at least GBP1500 per month into the current account; or that they take out a second financial product with first direct Citibank announced it would automatically upgrade current account customers to the Citibank Plus packaged account, which costs GBP120 a year and will automatically start charging current account customers the GBP10 monthly fee unless they contact the bank to tell them not to.

Industry announcements Banking Results Lloyds TSB, Alliance and Leicester, Barclays and HBOS have now released their 2006 annual banking results.

Within this, Barclays had record profits of GBP7,136m with write-offs of GBP2,154m (30.18% of total profits).

Alliance and Leicester announced profits of GBP569m with write-offs of GBP105m (18.45% of total profits) and Lloyds TSB released profits of GBP4,248m with write-offs of GBP1,555m ( 36.61%of total profits).

FSA fines The Financial Services Authority (FSA) fined Nationwide Building Society (Nationwide) GBP980,000 for failing to have effective systems and controls to manage its information security risks.

The failings came to light following the theft of a laptop from a Nationwide employee's home last year.

Capital One has been fined by the country's chief financial watchdog over the way it sold payment protection insurance (PPI).

The card company has been fined GBP175,000 and could end up shelling out GBP3m in refunds and claims to customers that bought its loan protection policies.

The fine is significantly lower than the GBP610,000 penalty handed out to GE Capital Bank, which provides store cards to the likes of Debenhams and TopShop and was fined by the FSA at the end of January.

APACS credit card spending Spending on credit cards fell last year, for the first time since they were launched in the UK in the 1960s.

Figures from the (Apacs) show that credit card spending dropped from GBP122bn in 2005 to GBP120bn in 2006.The 2% fall was due to the increasing popularity of debit cards, on which spending rose by 15% to GBP195.7bn.

Consumers also became more cautious about borrowing on plastic because of the build-up of personal debt.

Nationwide's views on banking fees Nationwide chief executive, Graham Beale, sensationally announced that he believed charging fees could be a fairer proposition than the current system of free bank accounts and high charges.

Uswitch.com consumer studies and reports Credit Card Affordability uSwitch.com's annual credit card affordability study revealed that one year on from the initial study, and six months after the implementation of changes to the Banking Code that were supposed to tighten up the assessment of a customer's ability to repay the borrowing, the income and affordability checks carried out by credit card providers are still inadequate.

In the last 12 months, 89% of credit cards were issued without the applicant being asked to provide proof of income and 96% were not required to submit proof of their outgoings.

Car Finance We reported on the high price of car finance within the market place and uSwitch.com showed that UK motorists are set to waste over GBP228 million by signing up to car showroom finance deals when they buy their new cars on 1st March.

Research from uSwitch.com reveals that consumers could waste on average GBP1,200 each in unnecessary interest payments if they opt for the over-priced credit deal from the car showroom instead of taking out a low-rate personal loan.

Innovation The new Halifax Ultimate Reward Current Account was launched into the market from February 19th, with the bank claiming the product to be "the best value packaged current account from a major High Street Bank" .

A rate of 6.17% AER is offered on the account and the benefits available on the product add up to a collective total of more than GBP800.

They believe that this account will be successful in competing with the other accounts in the market.

For more information visit uSwitch.com or call 0800 093 06 07.

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