"Brexit, bank passports, banknotes and bailouts: Janet Hontoir's June news round-up"

05 July, 2016

From the financial impacts from the Brexit vote to Help to Buy ISAs and poor savings rates for saving ISAs here are some of the biggest financial news stories of the month, compiled by Janet Hontoir, Academic Course Leader for ifs University College's BSc (Hons) Banking Practice & Management.

1. Fallout from Brexit

This is by far the biggest story of the month and it covers a wide range of issues. The key word is uncertainty, which has manifested itself in the crashes experienced in the equity and currency markets. But there are many implications for the financial sector, for example the Chancellor's budget plans, foreign investment, sovereign borrowing rates, interest rates, bank passporting, foreign workers in the UK, and UK workers in the EU, to name but a few. Some of these stories are in the articles below. There will be major impacts on all areas of the UK economy as the country seeks to disengage itself with the EU after 43 years of forging close ties. 

2. Bank passports

One of the uncertainties of Brexit is that of 'passporting', one of the most important advantages of EU membership to banks. Passporting is the right of a bank operating in the European Economic Area (EEA), including the EU, to carry on certain permitted activities in any other EEA state. Certain EU directives set out which activities are passportable and it is not known how British exit from the EU will affect them. If the Brexit negotiations result in banks based in Britain losing their financial passporting altogether, they will have to make changes in where they do business; and this could mean that some banks will move their bases out of London, which has up to now been the centre of their EU operations.

So banks are considering whether to apply for a new banking licence to operate in the EU or whether to rely on Mifid II's  'equivalent rules'. Under these, non-EU banks could be given 'third-country entity passports' to give them access to the EU if their regulatory regime is similar to that of the EU and if a reciprocal arrangement can be made.

3. Moody's cuts UK credit outlook to 'negative'

Moody's, the credit ratings agency, has cut the UK's credit rating outlook from 'stable' to 'negative' after the Brexit vote and says that the result would be the beginning of a 'prolonged period of uncertainty'. It also said that there would be 'negative implicationsfor the country's medium-term growth outlook' and that 'the negative effect from lower economic growth will outweigh the fiscal savings from the UK no longer having to contribute to the EU budget'. Moody's credit rating for the UK remains at Aa1, one step below the prime AAA grade, but the negative outlook is a warning that the Aa1 rating is at risk of being lowered.

4. Greece receives latest bailout installment

The European Stability Mechanism, the Eurozone's bailout fund, has paid Greece €7.5bn, its latest tranche of debt money. The deal was agreed in May but the money was not forthcoming until the Greek government had carried out the reforms on which the payment was conditional. Greece needs this money so it can service two debt payments, amounting to €3.6bn, to the ECB in July. 

The EU, and Germany in particular, is not prepared to forgive part of the Greek debt but the IMF has said that it will not contribute to the latest bailout unless plans are made to cut the huge debt burden. Greek public debt is around 182% of GDP and the 2015 bailout alone was €86bn. It is thought that debt relief will start to take effect from 2018, after Germany's 2017 general election.

5. OPEC is committed to a 'stable and balanced' oil market

The 169th Meeting of the Conference of the Organisation of the Petroleum Exporting Countries (OPEC) was held on 2 June in Vienna. It observed that, since its last meeting in December 2015, the price of crude oil has risen by more than 80%, supply and demand are converging and oil stocks in OECD countries are becoming more moderate. The Conference said that the 'market is moving through the balancing process' and confirmed its commitment to a 'stable and balanced oil market', with prices that suit both seller and buyers, but it noted that stocks are still above the 5-year average and need to fall. It also noted the low level of investment in the oil industry and stressed that upstream investment needs to rise in order to achieve long-term equilibrium. The Conference failed to set a cap on output so as to keep the price of oil from falling but Saudi Arabia promised that it would not 'shock' the market by increasing production.

6. Japan puts off sales tax rise again

Japanese Prime Minister Shinzo Abe, in true Abenomics form, has decided to delay the planned increase in the sales tax from 8% to 10%. This was scheduled for 2017, having already been delayed from 2015, and is now being put back to 2019 in order to stimulate growth - or rather to avoid repressing growth. The Japanese economy depends to a large extent on domestic consumption and a higher sales tax would reduce this. 

The Japanese government finds itself in a dilemma as greater demands are being made on the public sector budget by the ageing population, during a prolonged period of low and sometimes negative growth. Public sector debt has risen to $11tr, which represents more than 220% of GDP - the highest debt level among developed countries. 

7. Banks make frequent cuts to ISA savings rates

Kevin Peachey, the BBC's personal finance reporter, writes about a report on ISAs by the consumer group Which? into the frequency of interest cuts to ISAs from April 2010 to April 2016. Over the last six years, banks have cut their savings rate more often than building societies; they often pay a bonus to new savers but rates can fall to 0.05% after the bonus period has expired. NatWest cut its rates eight times across two accounts over the six-year period but has now simplified its savings products and no longer offers teaser rates. Clearly savers need to shop around for rates. 

Which? Money Editor Harry Rose says that 'too many banks are paying truly woeful rates of interest' and thinks that savers should 'consider parking their cash with one of the more reliable building societies who have been better at not cutting their rates for existing savers'. 

8. Warning on interest cost of longer-term mortgages

Because of high house prices and tight lending criteria, first-time buyers cannot afford to repay their mortgages within the traditional 25 years. But there are no rules limiting the length of a mortgage term and so the obvious alternative is to go for a much longer repayment period, during which monthly instalments are smaller and therefore affordable. 

But David Hollingworth of London & Country Mortgages warns of the risk to customers choosing very long-term mortgages, saying that they could pay 'tens of thousands of pounds more interest if they sign up for 40-year mortgages'. He accepts that longer is more attractive and quotes some figures. A mortgage which costs £948 per month over 25 years would cost only £716 (per month) over 40 years; the saving is clear. The capital sum is spread over a longer period but the interest is paid per year over an additional 15 years, adding and another £60,000 to the total payment. All this assumes that interest rates remain at the present very low rate but where rates might go over the next four decades is anyone's guess.

In addition, borrowers should take their age into account. Someone of 30 taking out a 40-year mortgage will be 70 when they finish paying off, above even the higher retirement age. 

9. High house prices put Help to Buy ISAs out of the reach of many

The Help to Buy ISA was launched by the government in 2015 to help prospective home buyers to save for their deposit. First time buyers place their deposit in a tax-free savings account and are given a 25% bonus, up to a maximum of £3,000, when they eventually buy their home. The bonus is available only if the purchase price does not exceed a cap of £250,000 (£450,000 in London). But an investigation by the BBC has revealed that the housing market has risen to the point where many prices exceed the cap and so the scheme is unavailable to many, although savers still receive tax-free interest. 

10. The new Churchill fiver

The Bank of England has announced that the new £5 note, bearing the image of Sir Winston Churchill, will enter circulation on 13 September 2016. The new note is 15% smaller than the current fiver and is made of polymer with a see-through window featuring the portrait of the Queen. It will be cleaner and more resilient (21,835 notes were replaced in 2015 due to damage) and it will have elements to assist people who are visually impaired.

Retailers and banks will have to change their self-service checkouts and ATMs to allow the new notes to be used. There are more than 329m £5 notes in circulation and it will take a year for the new note fully to replace the current one, which bears the image of Elizabeth Fry, the social reformer. The Bank of Scotland is also issuing a new polymer £5 banknote, due to go into circulation in this October.

Governor Mark Carney explained why Churchill was chosen: ""Our banknotes are repositories of the United Kingdom's collective memory and, like Churchill, our new polymer notes will stand the test of time"". The new £10 note, featuring Jane Austen, will be released next year and the new £20 note featuring JMW Turner will be in circulation by 2020; both will be printed on polymer.