Flagstone Weekly Update - 27 December 2018
27th December 2018
- Loyalty costing consumers £4 billion
- Bonds remain only way to beat inflation
- Inflation falls in November
- FTSE European 350 Bank Index fell by -1.3% over the last week
- ITRAXX Europe Senior Financials 5-year CDS Index rises by +7.8% over the last week
Consumers are paying £4 billion for loyalty by failing to switch providers on services including savings, according to the Competition and Markets Authority (CMA).
The watchdog investigated five markets – cash savings, mortgages, household insurance, mobile phone contracts and broadband, uncovering “damaging practices by firms, which exploited unsuspecting customers.”
Time-consuming or difficult processes to change contracts or switch to new providers, and not giving sufficient warning that a contract will be rolled over are among the key practices highlighted by the CMA.
The report highlights the necessity of constantly monitoring the best interest rates and proactively changing where necessary. The CMA said it welcomed the potential introduction of the Basic Savings Rate, but advised regulators that further interventions should be considered such as a targeted absolute floor price in cash savings and collective switching. However, it is very unlikely that any such measure will be introduced in the near future.
"Our work has uncovered a range of problems which leave people feeling ripped off, let down and frustrated," said Andrea Coscelli, CMA chief executive. "They shouldn't have to be constantly 'on guard', spending hours searching for or negotiating a good deal, to avoid being trapped into bad value contracts or falling victim to stealth price rises. Millions of loyal or vulnerable customers are being taken advantage of each year by firms – and end up paying much more than they should do. This must come to an end."
There are no cash ISAs that currently offer a rate that beats inflation, despite the Consumer Prices Index (CPI) falling to 2.3% in November. However, there are many fixed rate bonds that equal or better this rate, including nine on the Flagstone platform.
No variable or fixed rate ISA can outperform the current inflation rate, despite the base rate rise in August and the competition amongst the challenger banks which has seen bond rates rise in 2018.
"The fact that ISAs have fallen behind inflation for much of the year will be disappointing news for savers," said Rachel Springall, Finance Expert at Moneyfacts.co.uk. “Moving into 2019, it is anticipated that interest rates will continue to rise, so it is hoped that more savings vehicles will rise above the challenge to beat inflation.”
The appeal of ISAs has reduced dramatically since the introduction of the Personal Savings Allowance in April 2016.
Inflation fell to its lowest level since March 2017 in November, exactly matching the predictions of analysts. The fall was mostly driven by a large drop in petrol prices, with price decreases for both computer games and live music events also having an effect. There were price rises in some places, notably tobacco prices.
Many are predicting that the base rate will still rise further in 2019, owing to the effects of Brexit on the pound, though it was left unchanged by the Monetary Policy Committee of the Bank of England in their December meeting, in line with expectations.
Commentators predict further falls in the rate of inflation, suggesting it may even fall below the Government target of 2% in early 2019.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said inflation is set to decrease drastically in the coming months, due to lower energy prices. "Accordingly, CPI inflation still looks set to be below the [Bank of England's] 2% target right from the start of 2019 and to average just 1.8% over the course of the year," he said.
BANK FTSE AND CDS INDEXES
The FTSE European 350 Bank Index fell by -1.3% over the week, down by -1.3% to 3,703 from 3,753, as financial markets react to the slowing global and eurozone economic growth as well as the strong likelihood that the UK Government’s Brexit withdrawal agreement with the European Union (EU) will eventually be defeated in the UK Parliament.
The ITRAXX Europe Senior Financials 5-year CDS Index spread (series 30) has resumed its more expensive trend, rising by +7.8% over the week to 111.0bps from 103.0bps, as financial markets react to the potential adverse impact of the slowdown in global and eurozone economic growth as well as the likely defeat in the UK parliament of the UK Government’s Brexit withdrawal agreement with the European Union (EU) which could result in a further eurozone recession and cause financial difficulties for European businesses.