It’s time for another round-up of industry news items affecting UK stockbrokers, investment advisers and wealth managers. We hope that these updates continue to help readers compare UK stockbrokers and stay ontop of the latest innovations in retail investing. In this edition:
- eToro launches long-awaited ISA product via Moneyfarm partnership.
- Chip maintains an industry-leading instant savings rate
eToro launches Stocks & Shares ISA
One of the missing features of eToro as a broker is its account line-up. Unlike most FCA-regulated brokers that offer investment accounts to UK investors, eToro was one of the few that didn’t offer a Stocks & Shares ISA.
For the uninitiated, a Stocks and Shares ISA is a tax-protected account. Contributions are limited to £20,000 per tax year (or transfers from old ISA accounts funded in previous years), and any investments or cash in the ISA will grow free from income tax or capital gains tax.
ISAs are popular savings vehicles in the UK, albeit still underused by many middle-earners who could stand to benefit the most from them.
eToro’s announcement came on 10 March 2023, although it’s been April when clients have had the opportunity to explore what this means for them.
The broker has made the decision to partner with an existing start-up in this field, rather than administer an ISA product within its own platform. Its partner of choice is Moneyfarm – a UK-based firm founded in 2011. Moneyfarm belongs to the group of investment platforms that reduces choice and provides semi-automatic portfolio management in an effort to remove friction from the process. Moneyfarm offers thematic funds as well as a wide range of discretionary portfolio options for different risk appetites.
The partnership described by eToro doesn’t appear to feature a significant amount of integration between the two services and feels more like a referral scheme than a truly eToro-branded product. But the press release did go on to hint that integration could continue to develop in the future.
Moneyfarm calls the transaction an example of ‘B2B2C’, i.e. Business to Business to Consumer; suggesting that they do treat eToro as their primary customer, even if Moneyfarm themselves will take responsibility for the ISA platform and the customer relationship.
Chip continues to top the best-buy savings accounts tables
Chip, a UK finance app that features on our comprehensive list of UK brokers, is leading the way in passing on the most interest to UK savers, as a reward for depositing cash in the app.
During April, Chip increased its interest rate to 3.4%, in parallel with the Bank of England nudging the base rate up to 4.25%.
It may sound unusual to hear a bank or building society paying less than the official BoE rate, but this has become a commonplace feature in the period of recent hikes by the Monetary Policy Committee. No banks or apps have offered a rate that has matched the official rate on instant access deposits.
More competitive rates can be found if you’re prepared to lock away your funds for an extended period of time, but in a period of stubbornly high inflation, pundits disagree on whether interest rates will continue to rise, possibly locking savers in at an uncompetitive rate within a couple of months.
At a time when UK households are re-awakening to the financial impact of switching accounts to receive an attractive rate, Chip’s position in the best buy tables will be surely attracting significant inflows of deposits – likely from poor-performing current accounts that still barely offer a positive rate of return.
However, as always, inflation should always be taken into account when understanding the impact of saving in cash. With personal inflation rates ranging from 8 – 12% currently, no saver will feel better off after leaving their cash in a savings account for a year. Do not yet this deter you from saving, however, as a competitive interest rate is effective in minimising your loss of spending power.
Cash is languishing in low-interest accounts
According to a recent research report from the current account switching service, approximately £256 billion worth of cash in savings accounts in the UK is earning zero or very little interest despite 11 consecutive interest rate increases by the Bank of England. This has led to concerns about banks profiting from customer inertia (or lack thereof), prompting the country’s financial regulator to warn of potential interventions if this continues.
In response, there has been a surge in the number of consumers switching banks, with a record number of bank switches reported in the final quarter of 2022. Many customers are motivated by the desire to earn higher interest on their savings, and some banks, including HSBC, NatWest, and RBS, are even offering cash incentives of £200 per sign-up to attract customers.
However, the high level of customer churn resulting from frequent switching has raised concerns among banking insiders. These “serial switchers” are often money-savvy but not necessarily the most profitable customers, which means the cost of acquiring them only to lose them to a rival bank a year later becomes a concern for banks. This isn’t a new phenomenon; websites like this one and Money Saving Expert have for over a decade recommended that investors take advantage of sign-up deals to maximise their cash return. In the absence of any notable interest, such incentives were one of the few ways to meaningfully add to a modest cash balance stashed away since interest rates hit rock bottom in 2013.
Moreover, if regulators require banks to increase interest rates on existing customers’ savings accounts, which are currently below 1 per cent for many accounts, the costs for banks could skyrocket. Customer service is another important factor for consumers, but it comes with its own costs.
To meet their diverse banking needs, many consumers are opting to have multiple bank accounts. Digital banks such as Monzo and Starling have attracted millions of customers by offering features like fee-free foreign spending and budgeting tools. Although the interest rates offered by these banks may be small, the ability to set up separate savings pots is valuable to customers.
Younger, digitally savvy customers are particularly adept at transferring money between banks using their smartphones. The speed and ease of digital transactions have become a worrying problem for traditional banks.
The increased convenience of switching has also led to a secondary, negative effect: an increased propensity for bank runs. When switching bank only takes a few clicks, why would depositors with large, uninsured balances have any reason to take a risk with their current bank if rumours begin circulating about its solvency? This issue is said to have played a part in the rapid downfall of Silicon Valley Bank, Signature Bank and First Republic Bank in the US. When cash is so mobile, retaining depositors can be almost impossible when the cost of switching to a larger, safer rival is effectively free.
While cash savings can earn interest, investors are also cautioned against holding too much of their long-term savings in cash due to the potential impact of future tax bills. Holding cash in Individual Savings Accounts (ISAs) or Premium Bonds can provide tax advantages, and some investors are turning to money market funds within their stocks and shares ISAs as a short-term strategy to balance their portfolios.
As interest rates are expected to rise further, individuals are encouraged to ensure that their cash savings are working as hard as possible.