16 June 2015
Is your money safe with Renault’s new bank?
Although Britain's Big Five banks - along with Nationwide Building Society - still dominate the savings and loans markets in the UK, there's been a slow trickle of new and interesting challengers emerging from the sidelines over the past few years.
Some of these are just smaller versions of their traditional rivals. The likes of Aldermore and Shawbrook, for example, offer a simple set of products, typically at keener rates than their mainstream competitors. Importantly, they don't carry the reputational baggage that weighs down the old guard, and they provide an attractive alternative for people looking not just for a better rate, but also a better quality of service.
The unusual suspects
More recently, however, one or two names have emerged onto the scene which at first glance seem out of place in the world of banking. Hitachi - best known to most of us for its stereos and TVs - now offers personal loans at some of the most competitive rates in the market. Meanwhile, earlier this month, car maker Renault launched a UK savings bank, RCI.
New competition in any market is to be welcomed - especially if the challengers go beyond competing on price alone. Hitachi, for example, makes a virtue of having no early repayment fees, no application fees and more generally "no hidden fees". Its default fees are not exactly bargain basement, but unlike most of its competitors, it lays them out clearly for all to see.
New and quirky entrants into the loan market are much easier to accept that new savings banks, however. If you're borrowing someone else's money - then all you need to watch out for is whether the fees and charges are fair. But if you're handing your hard earned money over to someone else to look after - it's an entirely different proposition.
Security for savers
Renault, like Hitachi, seems a little out of place in the world of personal finance. Like most motor companies, it's been offering car loans for years. But borrowing money from British savers is a new and entirely different pursuit. As a savings bank, you need to be able to offer financial security - and demonstrate that you'll be able to return savers' money no matter what.
The first red flag for Rneault's new RCI bank is that it does not have a UK banking licence - and so is not part of the UK Financial Services Compensation Scheme (FSCS). Instead, the backstop for savers in the event that RCI goes bust is provided by the French depositor protection scheme - but only up to €100,000, which at today's exchange rate only amounts to £72,254. That's almost £13,000 less than the protection you receive if you put your money in a bank that is protected by the FSCS. And this limit could continue to reduce if the Euro continues to weaken against the Pound.
Next question, how likely is Renault to go bust? Well, its credit rating of BBB- means that any debt it issues is only a notch away from being classified as "junk" in the bond markets. This isn't quite as bad as it sounds - but the takeaway here is that Renault is at a much greater risk of going bust than any regular bank you might put your money into. In 2009, Renault made a €3bn loss. And let's not forget that General Motors in the US only survived in 2008 as a result of a government bail-out.
Worst case scenario
So, let's say for the sake of argument that Renault goes bust - what happens next? At that point, you're reliant on the French depositor scheme, which is in turn reliant on the French government remaining solvent. France may not be under any likely threat of going bust - but it does have a weaker credit rating than the UK - AA vs AAA.
This may sound like scaremongering, but the broader point is that British savers should not be having to make calls about the credit-worthiness of a bank or indeed the depositor protection scheme and sovereign nation that sits behind it.
There are very few banks in the UK that are not part of the FSCS - Triodos and Handelsbanken are the main two exceptions. A few others, such as Bank of Ireland and Bank of Cyprus - which once fell outside of the FSCS - went as far as to create new UK subsidiaries with their own UK banking licences, so that they could give their depositors the peace of mind that they had the same protection as the mainstream.
It's a purist view, but I'd wouldn't advise people to put their money into the new RCI Bank until it has its own UK banking licence. Its rates are competitive - but not so far ahead that it's worth accepting a weaker safety net. If it were up to me, I'd require all deposit-taking banks to have a UK licence and to be part of the UK FSCS. Allowing weaker banks onto our shores only increases the likelihood of a destabilising collapse which could undermine confidence across the sector. Even if every cent of depositors' money was handed back, the damage to the rest of our banking sector could be significant - and the resolution would be entirely out of our hands.