Not long ago, I described the market for savings accounts as in crisis. The brutal truth is that there appears to be no immediate sign of this changing.
In the opening six weeks of 2013, there have been over 200 tweaks and changes to savings accounts, according to analysts Moneyfacts, as banks draw the noose ever tighter around savers.
Only a small handful of accounts now exceed the current rate of inflation. These include a 60 Day Notice ISA from Coventry BS (2.80%); a cash ISA from First Direct returning 3% for balances of £40,000 or more; and a few regular saver accounts.
The best of these is Cheshire’s Platinum Monthly Saver Issue 6, which pays 5% gross on maximum monthly deposits of £500. But you’ll have to visit a branch to open this account, and the term only runs until next January.
While the Funding for Lending Scheme has had clear benefits for the mortgage market (fixed-rate deals have now hit record lows), lending to businesses remains poor, and returns on savings accounts have tumbled.
Recently, we highlighted a new and vibrant crowd-funding operation designed to address the funding gap for small businesses thought to be worth up to £191 billion over the next four years.
Now another operation has emerged, which hopes to solve both two problems in one.
New specialist lender AgriBank is offering market-leading fixed-term bonds paying up to 3.6% to desperate savers, which in turn will fund lending packages for struggling farmers – a sector which has fallen off banks’ priority lists.
The bank has been set up in Malta by Frank Sekula, former head of high-yield capital markets at Barclays, and Matthew Smart, founder of Eastern Counties Finance and former agricultural specialist at BNP Paribas.
It is regulated by the Maltese Financial Services Authority (MFSA), and has approval to passport its banking services to the UK by our own Financial Services Authority.
So, what’s it offering to savers?
3-year fixed-fate bond – 3.35%
4-year fixed-rate bond – 3.50%
5-year fixed-rate bond – 3.60%
How can the bank afford these market-leading rates? Firstly, operating out of Malta has major cost-efficiencies over the UK. Secondly – and crucially – the bonds are not protected by a deposit guarantee scheme, such as the FSCS, for which the bank is passing on the benefits. (What is the FSCS?)
In principle, if consumers still benefit, that’s fair enough. But in the event of a collapse, savers are left high and dry. That’s a real problem when the minimum deposit for the bonds is £10,000 and the shortest term is three years.
Instead of a guarantee, the bank claims to manage risk ‘aggressively’ through its expertise in the field (pun intended). Co-founder Matthew Smart has run his own Eastern Counties Finance broker and agricultural risk manager for 12 years, during which he has lent more than £400 million to the agricultural community without credit loss.
“We plan to operate a traditional banking model by taking deposits and lending them to farmers whom we know will pay them back,” said Frank Sekula.
Our aim is to offer savers more competitive rates than are currently offered by banks by focussing solely on the sector that we know best and being very efficient at delivering our services.
Herein lies the main issue, then: it’s effectively peer-to-peer lending – banking by trust. Savers must sacrifice their protection for a higher return and trust that the bank will manage its affairs properly. And as evidenced by the stream of ongoing scandals, it’s hardly been a great year for inspiring trust among banks.
In AgriBank’s favour, though, Smart’s record in agricultural finance is credible enough. He’s dealt with the sector for a long time and knows how to avoid loss. As far as savers can be expected to trust the merits of any specialist bank, the odds seem perfectly reasonable.
And the proceeds, whilst not charitable, are supporting a sector of the economy that we need to help if we want to avoid food-price inflation spiraling out of control.
Provided AgriBank does not make a mess of this, there are a lot of positives that could come out of this. It requires a real leap of faith, but it’s one multifaceted solution where few others are available.