The average saver could be forgiven for thinking that Northern Rock, the crisis-hit bank that was nationalised in February, was dead in the water. But in recent weeks the bank has been offering attractive rates across a range of savings products and has been successful in attracting new business. At the same time its mortgage products, whose financing caused the problems in the first place, have fallen down the competitiveness tables.
Northern Rock is offering 6.49 per cent on Silver Savings Online account, for the over-50s, which tops the rankings for older savers, while its instant access saving account – also paying 6.49 per cent is only slightly below Alliance & Leicester’s top-rated 6.5 per cent. It also offers a market-beating 6.45 per cent on its one-year fixed bond.
From the bank’s point of view this is all completely logical. It got into difficulties because it was unduly dependent on the money markets rather than individual savers for its funds. So attracting more individual deposits makes good sense. At the same time, in a worsening housing market, it is a good idea not to go after mortgage customers too aggressively.
But should savers put their money with a bank best remembered for images of lines of distressed customers snaking round the block? The key is the government guarantee. Deposits with Northern Rock enjoy a higher level of protection than that offered to other banks by the industry’s safety net, the Financial Services Compensation Scheme.
This industry scheme covers the first £35,000 of deposits should a bank or building society collapse. The government guarantee to Northern Rock, in contrast, applies regardless of the amount deposited and covers both existing and new accounts. There is currently no specific end date on this guarantee which is intended to stay in place "during current instability in the financial markets."
The industry-wide protection scheme is less generous than many overseas countries and may, in practice, turn out to be even less effective than it appears at first sight. Savers with deposits with several apparently independent organisations could find that these separate brands all belong to the same large financial group and that their entire portfolio is covered by only one £35,000 guarantee. It makes sense to check the ultimate ownership of your bank.
Northern Rock’s government guarantee may be open-ended but it is unlikely to remain so for long. Other banks that do not enjoy such generous protection are unlikely to tolerate for long a rival that offers market- beating rates. The British Bankers’ Association and the Building Societies Association are angry at this distortion of the market. The European Commission, for its part, will shortly be reviewing Northern Rock’s business plan to see that competition rules are not being breached.
Savers who take up Northern Rock’s fixed rate deals should be guaranteed these rates for time period specificed – typically between one and three years – but the period of government protection may not last so long. Northern Rock is however obliged to give its customers at least three months notice if the guarantee is withdrawn.
By CHARLES BATCHELOR