Sunday 25 July 2010

Government supports the banks ripping off the average saver – NS&I Index Linked Savings Certificates suspended

I’m sure by now that most readers will be aware that this week National Savings & Investments closed for sale its RPI+1% index linked savings certificates (ILSC’s). If they stay closed for a long time or even reopen in a few months linked to the CPI instead of RPI its going to give me and I’m assuming many others a few problems. My retirement investing strategy uses NS&I ILSC’s extensively. I currently have 20.7% of my net worth ties up in them.

I was using these certificates as they were the only low risk option which to my knowledge could ‘guarantee’ me my capital back plus a return after tax that matched a semi reasonable measure inflation plus a little bit. This was true whether we had inflation or deflation. I’m just not sure what I can use as a substitute now. If any readers have any ideas then please drop a comment as I’d like any suggestions. Of course I’d always do my own research before buying anything suggested.

What I think is disgusting though with the suspension of this product is the reasoning behind it. A quote in this weekend’s Financial Times says it all - ‘Jane Platt, NS&I chief executive, said the changes were a result of receiving net savings inflows of £2.4bn between April and June, well ahead of the £2bn target for the year. Continuing to attract cash at the same rate would risk starving banks and building societies of funds, making it harder for them to lend and to rebuild their capital after the credit crisis.’

I’m sorry but that shocks me. If it doesn’t you then read the quote again. The way I read it is that NS&I as an organisation backed by HM Treasury fully acknowledge that banks are operating as a semi cartel and are paying savers uncompetitive returns on their savings. Instead of continuing to offer a product which might eventually have forced banks to also start offering competitive products what we will do instead is collude with the banks in robbing savers by removing our product from sale.

So now it appears that HM Treasury and hence the government agree that it is acceptable for banks to be a semi cartel and punish savers at will. Here’s how it works in the real world, the world where I work. It’s called supply and demand and only the strong shall survive. Company A (that can be NS&I) has clearly done their market research and developed a product that has a Unique Selling Proposition (USP) which is attractive to the consumer. This is resulting in them gaining market share. Company B (that’s the banks) have a few options:

- they can continue as they are and accept they will lose market share. They do this because they know that their earnings as a percentage of turnover is excellent and so they trying to maximise profits. Eventually though they will have to offer a competitive product because as their turnover falls their cost block (that’s the employee costs amongst other things which would mean redundancies) continues to remove their percentage of profit.

- they can cut their cost block allowing them to offer a more competitive product while maintaining profit percentage.

- they can accept a lower profit margin and offer a more competitive product while maintaining their cost block. That of course IMO would be difficult for banks to swallow. After all they have to make record profits to pay out all those record bonuses to bankers.

- of course, they can also do nothing and watch their company lose market share until they start making losses. That continues until eventually they become insolvent. For some this might be unavoidable as they have already cut their costs but can’t come up with a competitive product that is profitable.

It should be all about market competition. In this instance the government wanted money from savers more than the banks and were prepared to pay for it. Banks could have followed and pushed up the cost of borrowing allowing higher rates for savers also. Unfortunately it appears as though our banking sector doesn’t operate like this. Instead I suspect the banks have completed plenty of lobbying and pressure of government and their ilk in the background probably saying things like we’ll become ‘bankrupt’ again if you don’t allow us to make record profits. In return Company A says sorry about that Mr Bankers we’ll just take our product off the market so that you can continue with your rip off strategy.

Disgraceful IMO.

As always do your own research.


  1. As a customer, your points are perfectly valid. I feel the pain too, so similar reasons, though I haven't been bright enough to be investing in this for as long as you so I only have a small NS&I stake.

    However, as a taxpayer I'm a part-owner of these damned banks, and I'd like to see them pump themselves up a bit. So it's a difficult call. There is some case to me made for NS&I not hamstringing the banks capacity to build capital.

    It is a shame for users though. The NS&I certificates were a unique product of inflation beating returns and almost 100% guarantee. The circumstances under which these would not be honoured would be where you'd need to be investing in tin hats, guns and beans. No commercial entity can give that sort of assurance.

  2. Hi ermine

    I wasn't saying that the banks shouldn't pump themselves up. I was just saying that they should be forced to compete on an equal footing with everyone else (supply and demand) who wants savers money rather than be given a helping hand at the expense of savers.

    I agree that the NS&I ILSC's did have an almost 100% guarantee. All this should mean is that they have to give a return on the borrowed money that is less than that of the banks. NS&I tried giving a return of 0.25% + RPI back in 2008 but since then went 0.7%, 1.0%, 1.0% and 1.0%+RPI. See here if interested Given that they raised their rate of return to the saver they must have thought this was the market price that they could get.

    The banks then as they are higher risk than NS&I should then be offering a return that is higher than NS&I. They can still make a profit by lending money to the borrowers out there at a rate that is higher than they borrow at. A true market in operation rather than the ficticious manipulated market that we see today.

  3. But if NS&I are effectively a QUANGO, then how relevant is the market to them? Could they give certificates at RPI+10%? Backed by the Treasury I guess they could. How can the banks compete with that?

    If a bank produced a similar product they'd have to finance it with more expensive loan rates, but if only one bank takes up the challenge they won't be able to sell those loans as the other banks will have cheaper loans since they don't have such an expensive capital base. Okay, so the other bank's deposits may shrink but only for a short while as the RPI+10% product won't be sustainable.

    Please correct me if I am spouting drivel.

  4. The question of where to store my cash in starting to become a real problem.

    I have a pool of cash that I have saved for a property deposit. I could use it within the next few months, or it could be stored within an account for several years to come. The money is stored within an ISA and I don't want to loose the tax free status of the funds, however there is not (as far as I know) a cash ISA that offers an above-inflation interest rate. To paraphase RIT, I think ISAs ought to be renamed to ILAs, as I am in fact loosing out with them.

    The situation as far as I am concerned is completely unacceptable and I struggle to understand how high inflation/low interest rates can be sustained. That said, for the last two months only one of the members of the MPC voted to raise the base rate; when I also consider that the government has changed their official measure of inflation to the CPI I am beginning to wonder for how long the goverment expects inflation to continue.

    As for the goverment/banking sector cartel, as far as I understand, the government do not want people to save. They want us to spend our money so that it circulates around the system and they can receive various taxes along the way.

    I am beginning to wonder if I should empty my cash ISA and use the funds to purchase gold stocks to hold instead.

  5. Hi UKVI

    Why would they pay RPI+10%? If supply and demand is operating they will pay the minimum they can to gain the market share they desire. If it's RPI+10% then that should be the market price for the respective market share. As I mentioned to ermine they should also be able to pay a return that is less than the banks due to the supposed government "guarantee".

    So IMO before the product was pulled they thought fair market value was RPI+1%. The banks therefore should have been offering more than that. Alternatively of course if NS&I was gaining more market share than they wanted (ie product was to cheap) then they could have offered a lower cost product. Even I guess in an extreme RPI-X% if they were still gaining more money than the government needed. That extreme would have given the government a cheap funding source and for once saved the taxpayer some money (remember the government still needs to borrow truck loads of money every month).

    At least the market would have been in operation rather than just pulling the product to help the banks profits.

  6. Hi Lewis

    I feel your pain. The NS&I ILSC's were a key part of my investment strategy as I'm sure you are aware. I now will soon have a problem of where to put low risk money.

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