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Lisa Kleiman

July 27, 2016 07:56:58 PM

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Why are some people better at saving money? Could your pension be at risk? How to kick start your business with a guarantor loan? Find out the answers to these questions and more from the independent loan broker Solution Loans, with lots of money saving tips and expert financial advice on a range of issues, from family budget travel to cheap home improvements and more.

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How the Financial Services Compensation Scheme (FSCS) can and can’t protect you

Since 2008 (the height of the “credit crunch”), news... You're reading the blog post How the Financial Services Compensation Scheme (FSCS) can and can’t protect you that was written by and first published on Getting Loans and Credit & Managing...

Since 2008 (the height of the “credit crunch”), news of companies failing seems to have been a fairly constant feature in the headlines. Often those who lose out the most are the every day people who have put their trust into a financial business in order to increase savings or put money aside for retirement. That’s why something like the Financial Services Compensation Scheme seems like such a fantastic safety net for consumers. However, this is a scheme that has its limits. If you’re hoping to rely on protection like this when you’re investing or saving your money, it’s important to make sure that the products and companies you’re using are covered. Financial Service Compensation Scheme (FSCS)

What is the Financial Services Compensation Scheme?

We have EU legislation to thank for the provision of the FSCS deposit guarantee scheme. All EU countries are required to set up at least one protection scheme. These days the amount protected is €100,000 (currently £85,000). The FSCS was set up to protect savings held in a UK registered bank, building society or credit union. For joint accounts the limit increases to £170,000. The scheme also covers a range of other financial products, including insurance policies and investments. If you’re claiming compensation with respect to an investment broker or management firm that has failed the maximum compensation limit is £50,000.

One of the major advantages of the FSCS is that the pay out to consumers is automatic so there is often no need to make a claim. Because all deposit takers – such as a bank – are required to maintain Single Customer View files, compensation can be automatically processed and paid out within seven days.

Who is the FSCS designed to protect?

It was set up to provide essential cover for consumers but also extends to small businesses. In order for an enterprise to come within the remit of the compensation scheme, business turnover must be low.

When can’t the FSCS protect you?

There are situations when the FSCS does not apply:

When you’re dealing with a foreign or unregistered bank or finance provider. The compensation scheme is only applicable where the firm involved is UK registered and regulated by the Financial Conduct Authority. It’s important to check whether the business you’re dealing with is covered by the regulator – you can verify this via the Financial Services Register. If the firm is not on the register, FSCS protection won’t apply.
If you’ve invested in a peer-to-peer platform. The FSCS does not extend to providing compensation for any investments you’ve made via peer-to-peer lending. That’s why it’s key to make sure you choose a peer-to-peer lending platform carefully – if it goes under then you will lose all your money with no safety net.
If the firm is still trading. The scheme will only kick in at the point that the firm in question has either gone into default or stopped trading.
Certain types of products. For example, pre-paid currency cards and savings schemes are not covered by the FSCS and nor is money held by PayPal.
Structured savings deposits. Some products that fall into this category do come with FSCS protection, including deposit-style accounts. However, if the product is an ‘investment-style’ structured product that relies on stock market performance it’s unlikely that this will be covered.
If your money is held with multiple institutions within the same group. Today many banks and building societies have merged and are part of the same group. FSCS compensation is available per one financial banking group or credit union and not for each separate bank and building society. So if you have £85,000 saved with two different institutions within the same group you will only be eligible to be compensated for one of the losses.
When you buy shares in a company that goes bust. The FSCS does provide compensation if there is a loss arising from bad advice or if an investment provider fails. However, there is no protection purely for buying shares in a business and that business subsequently goes under, as that is the risk with investing.
Any cash that is held in an offshore jurisdiction. If your money is saved in a location such as Jersey or Guernsey, for example, the FSCS won’t provide any protection.

An example of how the FSCS helps

Beaufort Securities was a broker dealer that failed in March 2018. Working with the company administrators, the FSCS arranged the transfer of money and assets belonging to more than 12,000 customers to another nominated broker so that investments could continue. It was also able to ensure that the majority of the affected clients were compensated for the costs of returning client money and assets.

The FSCS is a great scheme that provides automatic protection – as long as you fall within the limits of its remit. It’s always important to check that this is the case before you hand over any savings or cash.

Long-term drop in borrowing costs

Despite the increase in the Bank of England Base Rate in 2018, personal loan rates have continued in a pattern of decrease over the past couple of years. Tesco, for example, recently decreased the rate on its £25,001 to £35,000 tier loan to 6.7% APR for a term of one to five years. Average loan rates decreased by around 3.9%, which was a positive development for borrowers looking to pay less for credit. The long-term fall in personal loan rates is, in part, a response by lenders to increased competition and an overcrowded market that sees many having to offer better deals to secure consumer applications. Loan rates tend to be a better deal than credit cards and there are some fantastically low deals available. So what’s the issue?

Teaser rate discrepancies

Recent research conducted for Shawbrook Bank by the Centre for Economics and Business Research (Cebr) found that, despite personal loan rates falling, consumers could still be paying more than anticipated for borrowing. The study identified that borrowers could be paying up to two and a half times the headline APR of an advertised loan. According to Cebr, the average advertised cost of a £9,000 loan in the UK is between 2.8% and 5.5%. In contrast, the average APR that borrowers are actually paying for a loan is 7%. The difference between the interest actually being paid on personal loans, on average, in the UK and the advertised rates is pretty substantial. It shows just how off the mark teaser rates can be in terms of the expectations that they create about what the costs of borrowing are.

What is the cost to borrowers?

The Cebr research identified a figure of £194 million as the cost to consumers of being accepted for a loan that doesn’t have the advertised interest rate. Perhaps more importantly, it also raises the issue of whether borrowers are actually able to make an informed decision about borrowing when the real costs of doing so are so much higher than those that are advertised. The difference between expectation and reality could be as much as a 150% increase in costs, which could unbalance even the most carefully calculated budget.

The impact on consumer finances

The reality of loans that cost more than the advertised rate is that borrowers may end up with larger monthly repayments to deal with. There is also the more sizeable interest burden which, depending on the size of the loan, could end up being substantial. Both could create affordability issues for consumers who may find that their new borrowing becomes too much for their monthly finances to handle.

Getting the best possible loan rates

The ability to actually get the teaser rates that are offered by lenders is dependent on key factors such as credit rating. A higher credit score will enable a borrower to get a lower interest rate on a loan. However, those without a perfect credit score may find themselves with borrowing costs that are significantly more than what was advertised with the loan. So, nurturing a positive credit history is going to be key for anyone looking to get anywhere close to the lower teaser rates that lenders offer. There are many different factors that might affect a credit score, including:

How much existing debt a borrower has
Whether repayments on debt have been missed or late in the past
Inconsistencies or mistakes on a credit file that are not corrected
A credit file that is connected to someone else’s (e.g. an ex partner) and that person has a negative credit score or poor financial habits
Levels of stability, such as whether a borrower has lived at the same address for some time
Any legal action taken against a consumer in the past, such as a County Court Judgement (CCJ)

Although this is a positive market for borrowing personal loans there are a lot of different factors to consider. Key among these will be credit history and whether a borrower has a high credit score or not. For those who don’t score highly it’s always important to check the actual rates available, not just those advertised, to see what the reality of the costs of borrowing will be.

What are guarantor loans?

There are currently 12 guarantor lenders in the UK offering finance to individuals with less than perfect credit histories. The idea behind a guarantor loan is that a friend or family member – usually someone with a better credit score – guarantees the lending for the borrower. So, if the borrower is not able to make repayments on the loan then the guarantor will step in and ensure that the loan is repaid from their own pocket. The advantage of guarantor loans is that people with bad credit can borrow, both to obtain finance and also to start rebuilding their own credit record by keeping up with repayments.

What is motivating the FCA to act?

Affordability of lending has become increasingly important in every corner of the credit market. Ensuring that borrowers have the means to make repayments without undue pressure on their finances is essential for lenders who are looking to lend in line with best practice guidelines and regulations. In the context of guarantor loans, an increasing number of guarantors are being forced to step in and make repayments on behalf of borrowers – and this has attracted the attention of the FCA. This, it says, is an indication that loans may not be being approved on a true affordability basis.

Amigo Loans is the largest lender

Amigo Loans – which recently floated for £1.3billion on the stock market – is the largest guarantor loans lender by far. According to official Amigo statistics less than 10% of the loans it supplies to borrowers are repaid by a guarantor. However, it’s worth noting that Amigo recently got into some hot water over its targeting of “pilot loans” and this has also made the FCA sit up and take note. These are loans that are made available to borrowers who have a credit score so low that mainstream credit is out of reach. Pilot loans typically have very high interest rates – Amigo charges 49.9% – and in the year to March 2018, £99 million worth of pilot loans were issued by Amigo. Many of the new loans were thought to have been part of a drive to increase the size of Amigo’s loan book before its recent flotation. It’s behaviours such as this, as well as concerns about affordability for consumers, that have started to attract attention from the FCA. what it means to be a guarantor for a loan

The FCA focus

The FCA has already begun looking into the guarantor loans industry in more detail. Recently, the regulator published guidance for lenders looking to take a payment from a guarantor where a borrower is in default, for example. The guidance covered issues such as whether or not a lender is required to let a guarantor know before taking the payment. Default procedure is just one of the issues surrounding guarantor loans that the FCA appears to be getting increasingly concerned about. Others include:

Costs of borrowing. Director of strategy and competition at the FCA, Christopher Woolard, has also recently voiced concerns about the costs that can be involved in borrowing guarantor loans. Interest on guarantor loans can be charged at anywhere between 39.9% and 59.9%. The steep nature of these rates is something that Woolard has questioned given that the borrower may have a guarantor in place with a more positive credit rating than their own. Such a safeguard should, in theory, lower the risk for the lender therefore removing the justification for high interest rates. However, other bad credit personal loans that don’t require a guarantor are even more expensive!
Burden on guarantors. The average size of a guarantor loan is £5,000 with the average total repayment £7,500. Increasingly, more guarantors are being forced to step in to pay off the debts of friends or family members and the FCA is concerned about how this is likely to impact on those people. This may be especially difficult if someone dies or there are issues when it comes to the guarantor making payments.

Currently, there are no new restrictions to consider for the guarantor loans industry but that could be about to change. With the FCA interested not only in the cost of borrowing this kind of credit but also affordability, and whether guarantor loans work as a financial product, the industry could be about to go through a similar period of disruption as payday lenders have experienced in recent years.

LC&F – what happened?

Essentially, what LC&F was offering was a high-risk bond scheme that generated £236 million in investments after an intensive marketing campaign that included lots of content on Facebook. The company has now collapsed and is in the hands of administrators as a result of not being able to pay its debts. Unfortunately for those who invested with LC&F it’s thought that the bondholders could get as little as 20% of their money back.

The role of search engines

Although the LC&F said that it was targeting experienced, high net worth individuals with its financial products, in reality many of those who ended up putting their money into it were actually inexperienced investors. In fact, potentially up to 50% of those who invested arrived at the product via a basic online search for terms like “best ISA.” Search engines took them to two “comparison” websites – topisarates.co.uk and bestsavingsrates.co.uk. Both of these websites rated LC&F right at the top of their comparison lists.

Both of these websites are owned by a company that is owned by Paul Careless. What’s problematic is that Mr Careless also owns another company that was paid £60 million to handle the marketing for LC&F, indicating that the “comparison” websites may actually have been nothing more than a marketing tool. The connection is of great concern to investors who have now lost their money as a result of the collapse of LC&F and many feel they were misled into believing that the investment had been independently compared and highly rated.

What are the administrators saying?

LC&F loaned the money it collected from investors to 12 companies but would have had to have seen a huge return on it in order to be able to deliver the 8% interest it advertised. According to administrators it’s going to be difficult to get much of the £236 million that was invested back. Plus, the investments weren’t regulated, which means they are unlikely to be covered by the Financial Services Compensation Scheme (FSCS) – so far there has been no indication that the scheme will pay out.

What are the lessons to be learned?

It’s always a good idea to ensure investments are covered by the FSCS, especially for inexperienced investors. For those who read the FAQs page on the LC&F website it was there in black and white that the investments weren’t regulated, even though the business itself was.
It’s important to research widely. For those who went straight through to the two websites that were connected to the company responsible for marketing LC&F, without any further research it may have seemed like the bonds were independently assessed, compared and rated. However, outside of those two websites it would have been difficult to find anything that gave the same impression.
Learn to recognise marketing speak. For example, the LC&F marketing used the term “full asset backed security,” which sounds like the bonds were a low risk option. However, the term means nothing and is pure marketing waffle. Closer inspection of the terms and conditions for the bonds makes it clear that investors could lose anything up to 100% of the investment made in the bonds – i.e. they were very high risk.
If you’re not sure about the product, don’t invest. If you find terms confusing or you’re not 100% sure about outcomes it’s better not to hand your money over.
Nothing comes for free. Another element of the LC&F advertising was to claim that there were no fees, charges or set up costs. This would be a warning sign for an experienced investor, as it normally means that those charges have been hidden. With mainstream products, such as ISAs, it’s not possible to hide charges – they must be up front – however, unregulated products aren’t as transparent.
When something seems too good to be true it probably is. Most savers could achieve around 2% interest on mainstream products at the time that the bonds were being offered – significantly less than the 8% being marketed by LC&F. It’s important to understand that big returns always come with a big risk and to be sure that you’re willing to take that risk before signing up for anything.

For those who invested in LC&F the outcome looks bleak with no compensation scheme cover and a likely recovery of just 20% per investment. Hopefully the lessons that can be learned from the debacle may prevent a similar situation arising in future.

A new compensation scheme

Ofcom has established a new scheme that is designed to ensure that consumers who are having a bad broadband experience are automatically compensated. The scheme is not compulsory and only those providers who sign up to it are covered by its requirements. So far, BT, Sky, TalkTalk, Virgin Media and Zen Internet have signed up for the scheme and other providers, such as EE, Vodafone and Plusnet have indicated that they are intending to do so. The voluntary automatic compensation code of practice scheme was first announced in November 2017 and came into force as of April this year.

What issues is the scheme designed to cover?

It is predominantly aimed at issues that may arise with respect to faults. So, for example that could be repairs that have been delayed by engineers leaving a customer without service. It might be a newly purchased service that doesn’t start on time or engineers who don’t show up. There are more than 7 million cases where this happens each year so Ofcom considers the issue an important one.

How does it work?

There are three different levels of compensation depending on the issue that the customer has had to deal with, for example:

£25 – if an engineer does not come when they say they will or cancels within 24 hours
£8 – this entitlement is per day where a service stops and is not up and running again within two days
£5 – if a new service does not start when scheduled, the consumer is entitled to £5 a day in compensation

Currently, TalkTalk, Sky, Zen Internet and BT all provide their broadband services via the BT Openreach network. If the network has issues that cause problems for the providers, an agreement has been entered into that Openreach will compensation those providers. That money can then be used by the providers to compensate customers, as indicated above. Other providers, such as Vodafone, plan to start paying customers in the same way later this year.

Why isn’t the scheme compulsory?

According to Ofcom, the easiest way to ensure that customers start to receive compensation as quickly as possible is via a voluntary scheme such as this. Because so many of the big providers have signed up for the scheme 95% of homes in the UK should be covered by the right to compensation.

What about broadband speed?

Currently, the scheme doesn’t cover compensation for broadband speeds that aren’t quite up to scratch. If you feel like you’re having issues with broadband speed then there are a number of steps you can take:

Use a free online checker tool to establish how slow your broadband really is
Establish that equipment is working, such as the router, as this can also be responsible for slow broadband
Make sure you know what kind of speed your contract entitles you to. It’s also important to look at the small print, as many broadband providers won’t guarantee a maximum speed. However, if your service is falling below the minimum guaranteed speed then the provider may be in breach of your contract
Make contact with your broadband provider and highlight the speeds you were sold the contract on the basis of and the speed you’re actually getting – let them know that you feel the promises or statements made to you before you agreed to the deal were ‘misrepresentations’
Ask your broadband provider to check the access line speed to see if this is below the guaranteed minimum
Give your provider enough time to respond (e.g. 14 days) and if they don’t – or the response is not satisfactory – make a formal complaint to them. It’s worth checking whether the provider is signed up to the Ofcom Voluntary Business Broadband Speeds Code of Practice, which requires providers to offer certain support when there are speed issues e.g. letting you out of your contract without penalty

If you’re having problems with your broadband service there are steps you can take to remedy the situation, from the new compensation scheme, to making a complaint about speed. And, of course, you can always switch to a provider with better service.

Job vacancies are increasing

The most recent numbers show that unemployment has hit record low levels of 4%. In the three months running up to January 2019, the number of unfilled vacancies increased by 16,000 to 870,000. This comes in the context of a slowdown in growth, both in terms of the UK’s economic growth and growth on a global level. For example, in 2018, the UK economy grew by just 1.4%, which is the weakest level of growth that the economy has seen in six years. The increasing number of vacancies is putting pressure on employers, especially in industries such as IT, health and food services, which are some of the sectors that have been the most affected. Many are finding it difficult to hire the volume of workers currently required to fill available positions. As a result of this new market – a candidate’s market – total average weekly wages rose by 3.4% in the year to December 2018.

The UK jobs market – under the surface

Although the figures seem to indicate that everyone is profitably employed, all is not quite as it seems:

Up to 844,000 people in the UK are employed on zero-hours contracts as their main job – these are arrangements that provide no job security and pay wages that often make it difficult to live off.
While pay growth has increased slightly, it is still significantly below the previous peak of 6.6% recorded in February 2007. It’s also worth noting that real wages fell by 10% between 2008 and 2015. This was the biggest cut in wages anywhere in Europe, other than in Greece.
A lack of economic growth in certain sectors has also led to some significant job losses. For example, the manufacturing sector shrank severely with substantial job losses in vehicle manufacturing – and several big retailers, such as House of Fraser, went into administration in 2018 taking large numbers of jobs with them.
More older people joined the UK workforce – the over 50s made up one in five of the UK workforce in the 1990s but now account for around a third. This is attributed predominantly to increases in pension age and the fact that many Britons simply don’t have enough set aside for retirement to stop work.
Many of the “jobs” that count as employment are not what we would traditionally view as employed roles. According to the Resolution Foundation, two thirds of the increase in jobs has come from a rise in atypical work, such as self-employment, zero-hours contracts and agency work.
Use of food banks has significantly increased. Around six million jobs in the UK now pay below the living wage, which has left many households trapped in a state of “in-work poverty” where, although they are employed, they cannot afford to live.

The hidden impact of Brexit

Another cause of the sharp increase in employment is being attributed to one of the less obvious consequences of Brexit. Bank of England rate-setter Gertjan Vlieghe suggested that, as a result of the uncertainty over Brexit, many companies are not investing in plant, machinery and efficiency driving technology, as they normally might in order to meet the needs of customers. Instead, businesses are hiring people to enable them to keep up with customer demand. Although this might seem like a positive step, the reasoning behind it is that people are much easier to hire and fire. Corporate spending has continued to fall over the past year and British workers are relatively easy to get rid of. If a Brexit shaped recession starts to bite, many businesses would find it difficult to reverse investment decisions in technology, plant or machinery but could reduce a workforce without too much effort. So, rather than being a sign of a thriving economy, according to Vlieghe, the increase in employment could actually be a sign of economic stagnancy.

It’s often difficult to determine what’s really going on with the UK jobs market purely from employment figures alone. As a result of all the different factors involved, from growth rates to the changes in types of employment we have seen in recent years, it’s clear that positive predictions need to be taken with a pinch of salt.

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