Is the Funding for Lending Scheme working?
Introduced in the summer of 2012, the Bank of England’s Funding for Lending scheme was established as a means of boosting credit for businesses and households.
Under the scheme, any banks and building societies who increase lending to businesses or households will be able to borrow more funds from the scheme at a lower cost than those institutions who have scaled back on lending.
Banks and building societies participating in the scheme are able to borrow up to 5% of the value of their existing lending. There is no upper limit on borrowing under the scheme, and the cost to the bank/building society for borrowing under the FLS will be dependent on how much lending they do under a reference period set by the Bank of England.
Why was the FLS set up?
The FLS was put in place in order to incentivise banks and building societies to lend more within a financial climate which is still experiencing difficulties in recovering, particularly in the case of mortgages and loans for businesses.
Banks may offer the funds they borrow from the FLS in whatever ways they choose, such as offering lower rate loan-to-value products or reducing interest rates on existing products.
Is it working?
Despite the intentions behind the scheme, recent figures would appear to suggest that it is not having the desired effect. In reality it would seem that many UK banks and building societies have cut their levels of lending instead of passing on the value to businesses and consumers.
Cuts in lending have been witnessed across all the major UK high street banks and building societies, with Lloyds and RBS , both bailed out by the taxpayer during the financial crisis, cutting loans dramatically.
RBS have cut funding by £1.6 billion, despite having borrowed £750 million from the FLS, while Lloyds Banking Group, who have borrowed £3 billion from the FLS have cut funding by £983 million this quarter.
These figures have led to concerns that banks are simply using the scheme to shore up ailing reserves of capital. The banks who have cut their lending levels though have denied that this is the case, and insist that they have invested the money strategically in other areas and are still boosting lending.
Is the FLS boosting mortgages?
One key area which may be gaining some positive benefit from the scheme is mortgage lending. Mortgage providers are reporting an overall increase in lending across all levels of buyers, not just those with high value deposits.
The rise in mortgage lending is not however solely attributable to the FLS, other government backed schemes such as Help to Buy and NewBuy also contributing to the uplift in figures. The Council of Mortgage Lenders has reported that there has been an increase in mortgages to first time buyers over the past few months.
There has also been a marked increase in the number of remortgages which have been approved, with figures from April 2013 showing there have been 30,313 remortgages approved this year, which is higher than the previous six month average.
Future of the FLS
Despite the obvious boost the scheme has given to the mortgage market, it still does not address exactly why many of the major banks have cut their lending rather than increase it.
What is causing particular concern is the stall in lending to new small and medium businesses, which it seems are not benefiting from bank loans.
Lending to SMEs was one of the key targets of the FLS when it was established, and it was this area which it was hoped would benefit the most from the scheme. Banks are defending the limited lending to SMEs by saying that it isn’t lack of supply from them, but rather that there is a shortage of demand from businesses.
However the rise of peer-to-peer lending would seem to refute this claim by the banks. Peer-to-peer lending allows savers to lend money to businesses and individuals who may not have been able to borrow from the banks. Peer-to-peer lending more often than not offers better rates than the banks would, although there are of course obvious risks in terms of protection on the amounts borrowed.
Although peer-to-peer lending is still in its infancy and doesn’t lend anywhere near the figure to SMEs that the banks do, there is still room for growth. At present, there is approximately 250% growth per year within this market and it is still growing.
The government clearly still has faith that the FLS will do the job it was intended for and has increased the scheme into 2015 and has also provided more incentives for banks to increase lending to SMEs.
It remains to be seen though whether SMEs will still approach banks for loans under the FLS, or whether they will continue to seek alternative avenues of finance, such as peer-to-peer lending networks.
The FLS has also raised more questions as to whether the UK needs a centralised state investment bank, specifically for the purpose of investing in businesses. It is argued that this is the only option which will create stable growth to businesses and create new employment opportunities in the process.
The Bank of England has stated that the FLS would take time to show positive lending and they anticipate that this will happen in the latter half of 2013.
Money management to be included in curriculum
Secondary pupils in the UK will soon start learning money management in both maths and citizenship lessons as statutory elements of the curriculum.
A new draft curriculum has been written which would make “financial capability” a statutory requirement of the curriculum from 2014. These changes will “prepare pupils to take their place in society as responsible citizens by providing them with the skills and knowledge to manage their money well and make sound financial decisions.”
The new lessons will be tiered between the various key stages of the curriculum, and would be laid out as follows:
- Key stage 3 (11-14 yrs) – pupils studying at this level would be taught about the functions of money, the importance of budgets, how to manage money and they would also be given information about a number of products and services
- Key stage 4 (14-16 yrs) – at this stage, pupils would be introduced to the concepts of wages, taxes, credit & debt and would also be introduced to a wider, more sophisticated range of financial products and services
- Key stage 3 Maths – pupils in this group would learn how to solve and devise problems in financial maths and gain an understanding of simple interest
The move has been welcomed by the finance education charity pfeg (Personal Finance Education Group), who campaign education on financial matters for young people. Chief Executive of pfeg, Tracy Bleakley, has stated that “financial education is essential in equipping young people with the knowledge, skills and confidence they need to be able to manage their money well.”
It maybe argued that adding financial literacy to the curriculum is long overdue and that adding these subjects into lessons will go someway to preventing a generation who can sit in a maths lesson learning algebra and calculus, but not skills which will prevent them from sinking into debt after they leave school. How many times since leaving school have the vast majority of us ever needed to put into practical action much of what we learned in the maths class? Personally, I’ve never ever again had to use the sine or cosine buttons on my calculator.
The media is full of reports on the depth of financial hardship we are all facing, not just in the UK, but worldwide, and the current state of affairs in certainly not something that we should be passing on to future generations. Perhaps the fact that the UK government has finally recognised the need to equip young people with the tools to ensure that they have a relatively secure financial future.
Are banks embracing contactless technology?
Starbucks are the latest of the big high street retailers to embrace the use of contactless technology as a method of payment. They join a list of names which includes M&S (who this week have revealed that they are processing over 230,000 contactless payments every week) Tesco, Boots and Ikea.
The coffee chain have fully embraced contactless payments and will be rolling it out across their 570 UK stores by the end of 2013. Starbucks’ VP of marketing in the UK has said that the option for customers to use contactless offers them “the quickest and most convenient way to pay – which is not only great news for them but also for other customers in the queue.
Contactless payments have long been heralded as the next big thing in banking as it allows customers to pay for low value items (usually under a value of £20) without the need for keying in a PIN number, instead waving their card over the reader positioned at the till.
Despite this, UK banks have been slow to embrace wide use of this technology and have issued contactless cards to a relatively small number of customers. It is Barclays who have led the way with this, after introducing the first of these cards in the UK in 2007, they have since issued 20 million of the 31 million contactless cards in the UK, either via Barclays Bank or Barclaycard.
So what exactly is stopping the big high street banks from living up to the hype? Gocompare.com have conducted research into the scope of contactless payment in the UK and has found that only 6% of people surveyed have ever made a contactless payment. The research seems to suggest that people simply aren’t engaging with the idea of it, with 1 in 4 of the 2,000 participants in the survey saying that they simply found the idea “scary”.
Are the big high street banks doing anything to dispel the fears of customers? After all you can only pay in this manner if your bank has issued you with a card capable of it, so how do the banks measure up against the high street retailers.
Since Barclays are leading the way with contactless payments, it’s only fair that we mention them first here. They have issued over 19 million debit and credit cards allowing you to wave-and-go and have also introduced PayTag, a mini-card which you can attach to your mobile phone, making this an additional contactless payment device.
RBS appear to have committed to contactless technology as, from now on, all new accounts will receive a contactless card. This will also apply to any customers who need replacements for lost or stolen cards, or customers whose cards are due to be renewed.
With 22 million customers across Lloyds TSB, Halifax and Bank of Scotland, Lloyds remain one of the slowest to roll out contactless payments across their customer base, issuing only 1.5 million contactless cards to Lloyds TSB customers. They also have no immediate plans to automatically replace existing cards, instead allowing customers to request one if they so choose.
HSBC are working through a 3 year rollout of contactless cards to its 8 million strong customer base. HSBC began replacing existing cards in May 2012 and estimate that they will complete the rollout in April 2015, however in the meantime any customers who would like a contactless card can contact the bank and request one.
Co-op Bank’s debt rating downgraded to “junk” status
Customers of the Co-operative Bank have been thrown into doubt after the bank’s debt was downgraded to junk status last week by ratings agency Moody’s.
The move comes amidst concerns that the bank would need “external support” if it was unable to strengthen its non-core portfolio and shore up its overall financial position.
The Manchester based bank has already seen a tough few months, posting losses of £600 million in March of this year, followed by the news in April that it would have to pull out of a deal which would have seen them buy 632 branches from the Lloyds Banking Group.
It has been the scale of the downgrade which has caused waves in the City; Moody’s has downgraded the bank by 6 points on the scale, which will mean that any further borrowing that the bank does on the financial markets will be at a higher rate.
The move led to the immediate resignation of Co-op banking boss, Barry Tootell, who has been replaced temporarily by Managing Director of Retail Banking for the group, Rod Bulmer.
Despite the downgrade, Co-operative has said they are “disappointed” in Moody’s actions, claiming that they have “a strong funding profile and high levels of liquidity” and has taken steps to fill the shortfall by selling the insurance arm of the business.
The bank has also re-assured customers that their money is safe and that there will no bailout required, posting on Twitter that they had not sought, and would not be seeking in the future, any government help.
The Co-operative has a customer base of 6.5 million customers and held a high reputation for their standards of customer service and commitment to ethical banking. Although customers may have shown concerns about the downgrade, it seems unlikely that there will be a mass migration away from the Co-op to other banks.
The future at the moment may seem unclear for the banking arm of Co-operative, however they have stated that they are aware that they need to “strengthen their capital position” and also have a “clear plan to drive this forward throughout the coming months”.