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Retail banking proposals, Wonga losses and tax disclosure laws: Janet Hontoir's May news round-up

06 June, 2016Janet Hontoir

From competition in retail banking to tax disclosure laws, 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. UK inflation falls due to cheaper airfares and clothing

The UK's Consumer Prices Index fell in April to 0.3%, the first time it has fallen since last September. The ONS has reported that the main single reason for the fall was the fact that the Easter holiday was very early this year; this meant that prices fell sharply during April, when they would normally have been higher.

Airfares fell in April by 14.2% to their off-peak levels, after rising dramatically between February and March. The prices of clothing and footwear fell as retailers cut their prices to encourage sales despite the cold weather; there were also falls in vehicles and in social housing rents.

The Retail Prices Index fell from 1.6% in March to 1.3% in April. And core inflation, which excludes changes in the prices of volatile items such as energy and food also fell, to 1.2%.

2. Venezuela's serious economic situation

Venezuela is in serious economic trouble and a state of emergency has been declared. Inflation is running at a rate of 180% and there are shortages of basic products, including energy and power. The first problem the oil-exporting country faced was the plummeting oil price. Oil accounts for around 95% of export revenues and the proceeds have been used to finance the government's social programmes, which have now been cut back. The country depends on imported food but it now has a foreign currency shortage and has cut back imports too. There is foreign exchange control, which has led to a black market in currency.

Domestic food production has also been hit because firms have been refusing to supply government-run stores, where foodstuffs like milk, rice and corn oil are subject to price controls. This has resulted in shortages and food queues and these are being made worse by hoarding and black market selling.

3. More austerity for Greece

he Greek parliament passed a bill containing new budget cuts and tax rises in order to unlock the latest tranche of the European bailout funds the country needs - its next hurdle is the debt payment to the IMF and ECB of €3.6bn due in July. The bill also creates a state privatisation fund. PM Alexis Tsipras said that Greece is keeping its promises, as these measures were agreed in return for the bailout; but there is much opposition from some MPs, trade unions and individuals, who say that people cannot take any more austerity.

These measures follow pension and income tax reforms which were passed earlier in May. These will merge several pension funds, reduce some pensions payouts, increase social security contributions and raise taxes for people on medium and higher incomes. The PM says that most pensioners will be unaffected by these changes and that the new system will be more sustainable.

4. Credit Suisse makes a loss in 'challenging' markets

Credit Suisse has announced [PDF] a pre-tax loss of CHF 484m (the equivalent of £346m) for 2016 Q1 compared with a profit of CHF 1,511 in the same quarter in 2015. The bank said that client activity was 'drastically reduced' and that it had faced 'some of the most difficult markets on record'. It expects market conditions to continue to be subdued further into 2016. One of the reasons for the loss is the reorganised costs it faced and it has been cutting jobs and other costs.

5. Wonga faces increased losses but is taking steps to become more sustainable

Wonga has declared that its losses rose by 52% from £38.1m in 2014 to £80.2m in 2015. Its revenues fell to £77.3m from £217.2m, due to a 'reduction in UK consumer lending volumes following the implementation of stricter lending criteria at the end of 2014 and the introduction of the regulatory price cap'. The company carried out a 'major restructuring programme' and managed to reduce its costs to £125.5m from £151.4m. Its principal default rate (defined as the '180 days arrears rate of principal not repaid') fell from 7.4% to 4.4% for the Group and from 6.6% to 2.8% in the UK, reflecting 'strengthened lending criteria and a focus on positive customer outcomes'. 

6. Improving competition in the retail banking market

The Competition and Markets Authority's (CMA) Retail Banking Market Investigation [PDF] has released provisional findings into whether there is an adverse effect on competition om the concentrated retail banking marketing. The provisional proposals seek to make changes which will ensure that banks do not take their customers for granted and improve the quality of their service. These reforms would also help challenger banks to enter the market. The final report will be published by 12 August 2016.

7. Rise in mortgage age limit

Nationwide Building Society has now announced that, from this July, it will be raising the final payoff age from 75 to 85. This new rule will apply to existing customers for all standard mortgages, with a maximum loan size of £150,000 and a loan to value ratio of no more than 60%. It means that a 60-year old Nationwide customer could be granted a 25-year mortgage providing they can prove they can afford the repayments.

Banks are coming under pressure to raise the age by which people must have repaid their mortgages due to a combination of rising house prices, the long-term nature of a mortgage and the mortgage payoff age limit laid down by banks, which is making it increasingly hard for middle-aged people to access a home loan because they will be repaying into their retirement years.

Halifax also increased its age limit, from 75 to 80, recognising the result of its recent survey which suggests that 1 in 3 people between the ages of 20 and 45 can expect to have to work beyond their retirement age in order to pay off their mortgage. The cut off point differs across other banks. It is 75 at Santander, 70 at RBS and the earlier of 70 or the retirement date at Barclays. HSBC reviews applications of over-75s on a case by case basis. 

8. Debit cards will be the most popular means of payment by 2021

A report entitled 'UK Payment Markets 2016' has been published by Payments UK, the trade association which supports the payments industry. More than 38bn payments were made in the UK during 2015 and this is expected to rise to 42bn in 2016. At present cash is still the most popular and accounts for 45.1% of all payments but card usage is playing an increasingly important part and debit cards are predicted to become the most frequently used payment method by 2021. By 2025 it is expected that usage of credit, debit and charge cards will increase 50.2% of all payments, a trend which is being driven partly by the increasing popularity of contactless, especially with the over-60s. An increasing number of payments are being done via mobile phones. In 2015, more than two-thirds of adults regularly used online banking, and one-third used mobile banking.

Direct debits were used by 85% of current account holders but growth here is expected to be limited. Cheque usage fell by 13% in 2015, although 546m cheque payments were made during the year, showing that cheques are still seen as convenient and safe by a significant number of people. A decision to phase out cheques by 2018 was reversed because of this popularity and banks have promised to continue to process them for as long as necessary. Some banks do 'cheque imaging', whereby customers can take a photograph of a cheque and send it to their bank via their smartphone.

9. The Bank of England and Financial Services Act 2016 comes into force

The Bank of England and Financial Services Bill was given the Royal Assent on 4th May and has passed into the statute book. The Bank of England and Financial Services Act 2016 'confirms the Bank of England's status at the centre of the UK's economic and financial systems' and makes the Bank 'better equipped to fulfil its vital role of overseeing monetary policy and financial stability for the whole of the UK'. The new Act provides for the following:

 • It strengthens the Bank's governance and accountability by ending the subsidiary status of the Prudential Regulation Authority and by allowing the National Audit Office to carry out reviews of the Bank;

 • It enhances the Bank's ability to protect taxpayers from paying for bank bailouts by updating resolution planning and crisis management arrangements;

• It ensures that senior managers across the financial services industry can be held to account for failings that happen during their terms of office, by extending the Senior Managers and Certification regime to all authorised persons.

10. Economists call for global rules on tax disclosure

More than 300 economists from 30 countries, including Thomas Piketty, Ha-Joon Chang and Jeffrey Sachs, have written an open letter to world leaders, via Oxfam, saying that 'the existence of tax havens does not add to overall global wealth or well-being; they serve no useful economic purpose... they undoubtedly benefit some rich individuals and multinational corporations.., but this benefit is at the expense of others, and they therefore serve to increase inequality.'

The economists go on to say that tax havens 'undermine countries' ability to collect taxes, with poor countries proportionally the biggest losers' and that they distort the working of the global economy. They are calling for new global rules requiring companies to disclose their taxable activities in each country in which they operate; and also to disclose information about the beneficial owners of companies and trusts.

The economists' letter comes in the wake of the Panama Papers scandal and they believe that the UK is in a good position to 'take a lead in ending offshore secrecy as it has sovereignty over around a third of the world's tax havens through its Overseas Territories and Crown Dependencies.