First published in The Scotsman on 27 October, 2007.
Nothing is guaranteed in life, so why should bank deposits be? This is the only possible reaction to Chancellor Alistair Darling’s unseemly rush to underwrite the risk assumed by savers in the wake of the Northern Rock fiasco.
It is perfectly understandable that a new man at the Treasury – and his Prime Minister, who is weighing the pros and cons of a snap election – do not relish the spectacle of panicked investors queuing in Britain’s High Streets. But does that really merit treating a cash deposit radically differently from every other class of investment?
Because, let us be clear, a cash deposit in a bank or building society is as much an investment vehicle as equities, bonds, properties or financial futures. The fundamental rule of the market is that if someone makes an investment, they accept the risk attached to that investment. What the Chancellor is effectively doing is breaking this link.
His proposal, that the limit on which there would be a guaranteed return of capital in the event of a bank collapse be raised from £2000 to £35,000, introduces the concept of wholly risk-free investment with market rate returns. This, I am convinced, will come back to bite him.
I can understand the political thinking – the statutory protection of the UK’s army of small savers, for whom £35,000 might represent a lifetime’s savings. But the Chancellor’s preferred limit for a guarantee on savings is £100,000, and this takes the concept into a new dimension.
For a start, no one for whom £100,000 represents their life savings should have it all on deposit in one bank. Most people with this level of liquid assets are aware, or should be aware, of the clearly demonstrated advantages of a diversified portfolio. Cash in the bank should only be an element of such a portfolio, with the proportion determined by the investor’s attitude to risk.
The class of investor which will be sitting up and taking eager notice of Mr Darling’s £100,000 preference will include those people seeking a reasonable return on substantial liquid assets. If the £100,000 limit were introduced, an investor could choose from around 20 rock-solid banks and building societies in the UK to shelter £2 million in a totally risk-free haven with a commercial return. For many big investors, it couldn’t get any more juicy.
Were this to happen, the result could well be a flight from equities, with all the detrimental consequences this would have for industry, infrastructure and future investment in the UK. Why should an investor expose himself to the vagaries of the stock market for single-figure returns when he could expect 5% to 6% for cash on deposit with no possible risk?
And what about the potential danger to the long-term integrity of the government’s own “safe haven” facility of National Savings? Investors in this risk-free environment may be tempted to seek a better return from a guaranteed bank deposit.
There might be some merit to this proposal if Mr Darling were to make it perfectly clear from the outset – and the only means of doing this would be by legislation – that it would be incumbent on the banks and building societies to wholly fund such a compensation scheme themselves, perhaps along the lines of the travel industry’s ABTA scheme.
At the moment he only “expects” the banking sector to accept the financial burden. He has shied away from legislation in order not to “impose excessive pressure” on banks. So – talking of guarantees – there is no guarantee that the future bill for such a scheme might not be presented to the taxpayer.
The Chancellor has said from the outset that he wants to find a way of separating out the assets of small savers who would, in fact, be ruined by a massive bank default from those who would be cushioned by other asset classes.
Perhaps an alteration to the tax regime could help him make this distinction. At the moment, for instance, if an investor makes a capital loss on equities, he can offset this against future tax liabilities. There is no such provision for cash on deposit.
A reasonable solution might be to retain the universal £35,000 guarantee, which would protect the genuine small saver, but to make any capital loss above this limit eligible for offset – perhaps in a tapered manner adjusted proportionately to the investor’s remaining assets.
What the government must be wary of, however, is being pushed by short-term crises into making long-term commitments which could cost future generations dear.
Robert Kerr is Managing Partner of French Duncan, Chartered Accountants
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