Can the word “guaranteed” ever be used again on a financial product?
It is a very interesting term in financial circles and its use in marketing material for financial products has been carefully controlled by regulators and compliance departments. As a financial adviser, one has had to be very careful when using this term as invariably there have been conditions attached contained within the small print.
Obviously in the past where the word guaranteed has been used in conjunction with bank and building society accounts, there has been little doubt as to what it actually meant, namely that your capital was perfectly safe and would be available to be returned when requested.
Recent events have reminded us even in a UK bank account only the first £35,000 was actually guaranteed by the Government’s Deposit Protection Scheme. Public concern raised this figure to £50,000. And now this week we found Germany’s decision to protect all private bank savings and Iceland’s banking crisis putting the spotlight on chancellor Alistair Darling’s promise to do whatever necessary to protect British savers.
A precedent was set when Northern Rock got into financial difficulties and the Government had to step in as a guarantor of deposits. Since then the Northern Rock has been an attractive option with an underlying government guarantee.
We have recently seen the Irish government go one step further, not only raising their guarantee to initially €100,000, but subsequently guaranteeing all deposits in Irish banks. This has lead to an aggressive marketing campaign by UK branches of the Irish banks to attract depositors’ money.
So, is it safe with this guarantee? Of course it is as safe as the Irish government and in the UK, our Deposit Protection Scheme is as safe as the finances of our Government. But with UK Government debt at record levels, how safe is that? Can the word guaranteed be used?
My initial reaction is no because there have been instances of governments failing in the past and unable to pay their debts. Hence even though there is a tiny possibility of this happening, it is still a possibility and therefore the word cannot be used.
So there is no guaranteed investment. Therefore, when making an investment decision, we have to revert to the traditional risk and reward equation, as everything has risk and there is no such thing as a guarantee.
How much risk are you prepared to take? Why do some banks and building societies offer higher rates than others?
It might seem the obvious route when depositing money to seek out the most favourable rates by casting your net as wide as possible considering the various market options But could it be that sense of satisfaction placing your money with a building society or bank offering a better rate than the earlier options you considered is misplaced?
The global economic crisis has shown the fatal consequences of irresponsible lending. Is it because they are in financial difficulties and need to attract additional deposits that financial organisations are offering those rewarding rates? If so, that means that the highest paying accounts are not necessarily as secure as others and should possibly be avoided.
Traditionally, the ultimate investment safe haven has been either Government gilts or national savings, both having underlined “guarantees” from Her Majesty’s Treasury.
When the Government needs to raise money it issues effectively loan notes or bonds, which promise to pay the amount back at a future date with a fixed rate of interest in the meantime.
A lot of gilts are going to be issued to raise money to meet the Government’s banking guarantees, further increasing debt. Gilts can be bought and sold by individual investors, either using their own knowledge or using the professional services of a stockbroker. Alternatively, a portfolio of gilts can be purchased through a unit trust or OEIC (open ended investment company), as they are now usually known.
National Savings and Investments offers a different range of investments including Premium Bonds, ISAs, Savings Certificates and Income Bonds. The website www.nsandi.com gives a useful guide to what is available and current rates.
Although the rates of interest are less than the many available on the open market, there are tax benefits for using gilts and National Savings products, particularly attractive for higher rate taxpayers.
So, if you are still worried about banks and building societies defaulting with the loss of your savings, you can put your trust in either the UK or Irish governments.
If you are still worried, then there is no hope for any of us because if one of these governments defaults, then the game really is up.
Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located at Barston near Solihull. E mail: TILaw@montpeliergroup.com