Could this plan give Child Trust Funds a future?

Child Trust Funds (government payments of £250 at birth and age 7 into an investment plan) are likely to be scrapped for all families with an income of more than £16,000, if the Conservatives stick to their manifesto pledge.

The Lib Dems wanted to to scrap them entirely. The coalition government is yet to announce what it will do.

In a new document today - The Coalition: Our Programme for Government - there was still a lack of detail, stating only: 'We will reduce spending on the Child Trust Fund and tax credits for higher earners.'

For and against CTFs

Fans of CTFs argue that they are key to teaching a new generation how to save.

Opponents say they are too big a cost in the age of austerity.

The SMF plan for saving CTFs for middle income families

Today, a think-tank today suggested a way to make CTFs 'work better for much less money'.

The Social Market Foundation argues that the cost of the scheme could be reduced by two-thirds by cutting the value of the CTF voucher given to each child at birth from £250 to £50 and scrapping the second contribution on a child’s 7th birthday.

To better encourage saving in the CTF, the government should match families’ contributions up to £50 per year up to age 5 funded by axing tax relief on all non-CTF children’s savings, it says.

The SMF argues: 'With reform, Child Trust Funds can achieve important policy objectives for the government widening financial engagement particularly amongst the less well paid, encouraging saving and giving all young people a financial stake in the future.'

The think-tank says that in contrast, other children’s savings accounts, which benefit from tax-relief, are typically used by wealthier households to shelter their savings from the taxman: government figures show that half of all children do not have any financial assets of their own.

To cut the annual cost of the Child Trust Fund policy, the SMF says the government should:

• - Abolish universal CTF payments for seven year olds, saving £218.5m;
• - Reduce the value of universal payments at birth to £50, and the value of additional awards for lower-income households to £200, saving £153m;
• - Abolish tax-relief on non-CTF children’s savings accounts for under-16s, saving the Exchequer £181.4 million, and recycle this saving to fund the cost of CTFs.

To improve saving rates and active engagement with Child Trust Funds (CTFs) among lower-income households, the SMF says the government should:

• - Simplify choices around opening a CTF account;
- Develop behavioural interventions, such as direct-debit schemes;
• - Impose restrictions on how Child Trust Funds can be used at the age of 18;
• - Make receipt of full voucher entitlements among low-income households conditional on using financial advice
• - Strengthen the role of the CTF in citizenship policy;
• - Implement matching contributions for low-income households up to £50 each year for the first five years of a child’s life, at a cost of £165m per annum.

My view

Speaking as an investor in two Child Trust Funds, I accept that doling out a total of £500 on Britain's richest kids is a nonsense. But entirely scrapping the scheme entirely for middle income families is throwing out the baby with the bathwater - especially if the Coalition government is to tranform Britons from consumer-obsessed spenders into shrewd savers.

My elder child will soon be at an age where I can explain why he's the proud owner of a growing investment account. Millions of other children will also be having the same conversations - without Child Trust Funds, that learning process would not be happening. Let us know what you think [Do you agree with the SMF's plan for CTF's?] and put your view in the comments box below.

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How banks took us all for mugs (and got away with it)

I’m at the European Commission’s Consumer Summit in Brussels, which has a focus on bank fees, and reluctantly, I’m beginning to accept that the villains of the Noughties will simply walk away from the mess they've created.

Let’s lay out the charge sheet covering the major sins of the last decade:

* Casino banking was a major contributor to the economy-wrecking credit crunch;

* Banks, and other lenders, pushed loans and mortgages to those unable to repay – on a grandscale;

* Banks aggressively ramped up the cost of banking for those most likely to be in financial hardship: the applying of penalty charges (sometimes more than £35 a pop) for millions of customers;

* And so as not to leave any group of customers feeling left out in the exploitation stakes, bank ‘advisers’ flogged high-risk investments to customers looking to avoid risk.

How not to treat customers

So, we have bank account customers, borrowers and investors all wronged to varying degrees.

It’s not exactly something out of the Tesco manual of how to keep your customers happy.

But hey, why should they care? The banking industry remains massively profitable, bankers continue to collect enormous bonuses and there’s little evidence of any over-arching force bringing it to an end.

For some bankers, it feels like the party’s only just begun. After all, some of the competition has disappeared at a time when there’s more business to be done: countless recession-hit companies have been forced to turn to banks to help them raise money by issuing extra shares or bonds. And the cherry on the cake has been that central banks have generously slashed rates and therefore borrowing costs for banks.

But don’t get me started on investment banking.

Instead, let’s focus on the banks’ consumer sins for a moment (putting aside the casino banking that bought about the worst recession in 80 years – that’s the last time I’ll mention it. Promise).

Credit cards, loans, mortgages

Banks lent to people who couldn’t afford it. On loans, they also added expensive insurance (payment protection insurance) that customers often didn’t need, or disguised the true cost of repaying the debt. They also sent enticing ‘cheques’ that added expensive debt to their credit cards of those cashing them. These, of course, were mostly cashed by those least likely to be in a position to repay. On mortgages, loans that were more than five times bigger than annual income were common. Some of those people are now in arrears or have had their homes repossessed.

The result: As the borrowers fail to repay all of the money lent out, the banks simply pass on the cost to other borrowers. That’s why rates on loans and credit cards have soared relative to the base rate in the past two years.

Action: The EC passed laws in 2008, which now force banks to make rates clear from the start. That doesn’t help those already lumbered with expensive debt. Today I asked the EC consumer department’s head of financial services and redress, Dirk Staudenmayer, whether banks can be trusted to make individual lending judgements. He preferred to put the emphasis on financial education: teaching the next generation how to manage money. But what about those in trouble today?

Investments

If you have a pot of cash, the last thing you should do is ask your bank what to do with it. That, at least, is the conclusion you could make from reading the countless tales of mis-selling in recent years. Our sister title Money Mail has done an incredible job in exposing this dubious practice. Basically, bank staff were able to earn better commission by selling a risky investment when a safer product may have been better,

Result: Sadly, many of the victims were elderly people looking to place their money somewhere safe where it could pay them an income. Some lost most of their money. Some Barclays customers were inspired to set up a website: http://www.barclaysinvestmentvictimsclub.co.uk/
Banks claim to be phasing out dubious bonus schemes.

Action: The FSA, which regulates the industry and makes up the rules, and the Ombudsman, which decides on compensation, are being urged to work together more closely to spot when problems arise. But there are no new rules in place to stop banks doing this again once the dust settles.

Bank accounts and charges

The banks began steadily increasing penalty charges – fees on exceeding overdrafts or bouncing cheques, etc - in the early Noughties as an easy way to make more money. But they overcooked it, and some shrewd consumers hit back. They found a law that suggested penalties should only cover the costs incurred by the bank. The industry ran scared, paying out millions in refunds until a two-year test case that repeatedly found against the banks got turned round on appeal, with the UK Supreme Court ruling late last year finally killed off the refund party. This week the Office of Fair Trading, previously feisty on the issue, tamely admitted that banks had done much to reduce fees..

Result: Many bank customers are unlikely to get back fees at a time they could really used them - the banking industry-induced recession may have left them struggling. They can still attempt to get back unfair fees by putting a case to the ombudsman. But in the end, the banks will probably keep most of the rip-off charges. Meanwhile, charges are lower but there’s no rules to stop them rising again – only consumer and media coverage could stand in the way.

Action: The OFT will continue to look at the issue, but don’t expect much given that the Supreme Court ruling clipped its wings on the issue. As for Europe, surely there’s good news around the corner if the EC’s consumer bods are focused on bank fees? I asked the top man on consumer issues John Dalli - the new EC Consumer Commissioner. He wants to provide the means for consumers to compare bank accounts on the full price (all bank fees included). He believes transparency and comparison is the answer then it can be ‘left to the market’. If this comparison could be extended across borders, then that would help further, he says, increasing competition and decreasing costs.

I like the theory, but the full 'harmonisation' of banking services across Europe is unlikely to happen in my working lifetime.

What’s more, Britain’s online banking comparison industry is far more advanced than in Europe. But the EC’s study of the cost of banking in nation states last year ranked the UK a pitiful 17th, with customers paying nearly £100 a year, on average. Conclusion? Widespread access to bank comparisons has not made banking cheaper in the UK.

The issue in the UK is the lack of competition (consider that the recent banking licence granted for Metro Bank was the first for a start-up in 150 years).

And that’s why bankers will get away with it.

P.S. Feel free to use this blog post to urge the EC and UK authorities to get tough on any of these issues. I’ll make sure they see it. Then write to your MP and tell them how you feel.

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Why it pays to complain... properly

Last week I witnessed possibly one of my favourite moments in television history.

OK, OK maybe that’s a slight overstatement, but the sight of a grown man unashamedly admitting that he has written to his local council to complain about himself was pure TV gold.

And the clincher for me? He was complaining about himself... for sending too many complaints.

Chris ‘the professional complainer’ Byrne made 179 complaints in all to his local council. Most of them were petty gripes – park benches in the wrong places, broken drain covers in roads and such like.

His official moanings had seen local authorities rack up a £100,000 bill investigating them all. But, rather tragically for the council, only three were genuinely worth the effort.

And - surprise, surprise – those three upheld grievances included the one against himself.

All in all, ITV’s It Pays to Complain was a bit of mixed bag. Some moments you thought, ‘Hey, it really does pay to complain - I’m off to get my money back!’; others, you were left frustrated as the advice dished out by presenter Jonathan Maitland and his side-kick, complaints expert Jasper Griegson, failed to hit the spot.

Alongside Mr. Byrne, ITV managed to unearth another unique character, Danielle Gallagher. Danielle told us she receives between £700 to £1,000 a year, averaging several complimentary vouchers per week, just for writing letters of complaint. Another professional whinger, but this time with an end product.

But the crux of ITV’s programme revolved around two hidden camera experiments to see how far the great British public needs to be pushed before the complaints start rolling in.

The first took place in a restaurant. ‘We’ve hired the worst waitress in Britain,’ Maitland said as three unwitting customers, Jenna, Sarah and Fabienne, were treated to unacceptably shoddy service.

First, the waitress dallied for 15 minutes before taking their order. Then she answered a phone call in the middle of noting their choices. Next, she brought out the wrong dishes and asked them to eat the food anyway. Finally, she added a 20% service charge to the bill.

Not a word of complaint. Not one. And they met the bill in full. ‘If we were with our boyfriends we would probably have walked out or got some money off,’ the girls explained afterwards. Not an acceptable excuse, said the experts.

In another scene, ‘Eddie the taxi driver’ takes all sorts of liberties while his passengers watch the meter tick round. In one set-up, he takes several wrong turnings, adding a few extra pounds to the fare. In another he stops for a newspaper, leaves the meter running, and dawdles around outside a local convenience store. Again, no complaints.

It made intriguing viewing – a window into our reserved Britishness. But for all the entertainment, ITV’s offering was short on substance. What should we say when a taxi driver takes liberties like that, Maitland asks? ‘I’d say something. I’d be firm but polite’, says Jasper. Thanks guys, but we need more.

Getting your money back often comes down to writing a succinct, yet powerful, letter of complaint. But as Danielle Gallagher would attest, this is a skill in itself. She offered up a couple of excellent pointers to getting started:

‘Know what you’re complaining about and don’t go off on a tangent,’ she said. ‘And know who you’re complaining to, as well. It’s no good complaining to the check out girl or waitress who’s just served you’.

Sound advice. But what about the actual writing business? What should you say? How should you word it? This is where ITV stopped short. Which was a shame, because a little guidance at this stage and you could be on to a winner.

But no fear, if it's help you crave, you've come to the right place. At This is Money we’ve put together a guide on how to write the perfect letter of complaint. It’s not a guarantee for success, but it’s as close as you’ll get.

So if you’ve been mistreated by a company and left out of pocket, don't get mad. Don’t sit back and accept your fate. Get even. Jasper Griegson, the 'King of Complainers' expands on the useful hints and delves into the finer details of the getting your money back.

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The credit card trick that won't die

Read about a credit card trick that just isn't dying, despite the best efforts of the government, the media and others.

It astounds me that none of our usually sharp-eyed readers have spotted an unexpected discrepancy on their credit card bills from September, but it's some comfort that no readers anywhere else have either.

I'm hoping it's because you lovemoney.com readers have been using your credit cards in a way that avoids all the many costly traps. One of the sneakiest and most expensive is supposed to be scrapped from the beginning of next year. Due to government pressure, the credit card industry has agreed to re-order the sequence in which we pay off the various debts on our cards (cash withdrawals, balance transfers and purchases being the main ones) so that the most expensive is paid off first.

Up till now, if you had, say, a balance transfer at 0% and a purchase at 16%, whenever you made a repayment the card provider would reduce your balance transfer first, leaving the more expensive purchase on the card for longer and therefore costing you much more interest. This practice is known as negative order of payment, but in January it should be reversed.

There have always been honourable exceptions to this that take a positive order of payment, notably the Nationwide Gold Card and the SAGA Platinum Credit Card, but 99% of credit cards have had the negative (expensive) order of payment I've just described.

MBNA (which includes the popular Virgin Credit Card and dozens of other brands) has tried to grab some attention by making the changes early. From September 2010 it has been paying off the most expensive debts first.

Or has it?

The credit card trick that won't die

Two months ago, I put my cynical hat on (it's rarely off) and called MBNA to find out exactly how it was going to implement the changes. I learned, incredibly, that it is still not going to quite make the switch to a completely positive order of payment.

Here's how it's going to keep doing it. Let's say you have a 0% balance-transfer deal lasting 12 months and a 0% on purchases deal lasting three months such as the MBNA Rewards Credit Card. (Most cards offer long transfer deals and short purchases deals.) If MBNA was giving us a completely positive order of payment, it would pay off the the purchases deal first during the initial three months. That way, if you have a £600 transfer and a £600 purchase, you could pay off the purchase in three months at £200 per month and be charged no interest in the fourth and following months.

However, MBNA is not doing that. When two 0% deals are running simultaneously, rather than paying off the shorter 0% deal first, MNBA will use your repayments to pay off the deal that reverts to a higher interest rate. You might have a balance transfer deal expiring in 12 months reverting to 17% and a purchases deal expiring in three months reverting to 16%. Rather than pay off the urgent purchase first, MBNA will pay off the transfer instead. The nub is that you will pay more interest sooner, and most people will pay much more interest altogether.

Back in August, MBNA's interest rates for balance transfers and purchases were identical but, low and behold, now it has increased the balance transfer rate by a couple of percentage points. That's all it needs to ensure that, after three months, those people who used both deals and haven't fully paid off their card will still pay interest.

Extraordinary defiance

Considering the huge pressure from the media and consumer groups, and threats from the government, this just shows how extraordinarily little respect lenders have for customers and authority. It's clear that treating customers fairly in the financial industry is still a long way off.

These firms have an unfair advantage in their knowledge of marketing and their expertise in cooking up contracts. We could be excellent scientists, mechanics and doctors trying to work hard and be productive, but since we have no training in matters of debt, we could be struggling under it, and being less productive and useful because of it. Lenders, meanwhile, work at nothing other than improving their methods for taking more money from borrowers.

As far as I know, I'm still the only commentator to have realised this trick continues at MBNA. I have read thousands of contracts and have years of practice gleaning these things, but if I'm still the only person to have realised what's begun here, what chance does the typical consumer have when attempting to read the small print? If the full force of the media, government and consumer groups can't protect us from these things, I don't see who can.

What this trick might now cost you

MBNA is still, even after huge and sustained condemnation and campaigning, clinging on to what it can from this old card trick. The good news is the power of negative order of payment has been substantially diminished. Anyone with a few thousand pounds on a new card before these changes might have expected to pay hundreds extra in interest per year. Now the extra interest could be reduced to just tens of pounds extra. Even so, from the many tricks card companies use, it will still remain one of their greatest winners.

Not all card providers will do the same

I called a couple of other banks to see what they're planning to do. Barclaycard, which will implement the changes on 26 November 2010, said that it will pay off the shortest 0% deal first. In other words, it should apply true positive order of payment, although I won't relax till I've read the details for myself.

Lloyds Banking Group told me it will always pay purchases before balance transfers when the interest rates are equal, regardless of the lengths of the deals. This means if the banking group develops a card with longer purchase deals than balance transfer deals, you'll meet the same trap as MBNA in reverse. The group comprises of Lloyds TSB, which will implement this new hierarchy on 15 January, and Halifax and Bank of Scotland, which will do so on 20 November.

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No more tired excuses on credit card debts

Let there be no more petty excuses - if you get into debt on credit cards, you’ve only got yourself to blame.

The news today that banks are ‘luring customers back into the red’ with juicy introductory credit card rates has been twisted by the critics to say the least.

It’s almost as if the poor, desperately in-debt Mr. Average Briton is scrambling around looking for a scapegoat. And in banks, he’s find a ready-made villain. ‘Why, oh why, did you offer me credit I couldn’t afford?’, Mr. B says. Please. Give me a break.

It reminds me of that wonderfully allegoric film, ‘Confessions of a Shopaholic’. You wouldn’t have thought it, but this Hollywood chick flick is as potent a study on modern consumerism as a scholarly journal (and easier on the eye, too).

Protagonist Rebecca Bloomwood (Isla Fisher) is a college graduate with a shopping addiction. She manages to rack up £19,000 of debt on credit cards buying clothes, bags, shoes etc.

And all this before she has a job. The metaphor for our modern consumer culture is clear: Rebecca can simply spend, spend, spend with no thought for tomorrow.

Her spendthrift profligacy is, of course, only made possible by cards offering dirt-cheap credit. But that is not the message of the film. No. The moral here is that getting into debt was her choice, her responsibility.

The same is clearly true in our own lives. Undeniably, having the ability to make key purchases when your cash flow has dried up is positive. Thank goodness for the credit card when you’re two days from payday and the fridge looks like a wasteland – crumbs, spilt milk, a knob of butter, but little else.

The problem, though, is that we abuse this luxury, this lender of last resort. We spend more than we have on cards far too often. ‘I want that plasma TV and I can afford it because I have a credit card’ is no good when you’re already deep into an overdraft.

We keep rack up debts, transfer the balance from card to card, pay off the minimum each month and try to survive. But eventually it always comes back to bite us when the interest-free periods end and we’re hit with punitive rates. Many borrowers end up paying through the nose for costly cards advertised as ‘free credit for 12 months'.

In ‘Confessions…’ (without ruining it for those still keen to watch), that’s exactly what happens to Rebecca, who is stalked by a debt collector throughout.

Blaming banks and card providers for our woes because they offer enticing deals is pretty pathetic – we must all learn to manage our own finances and take responsibility for our spending. Yet it’s almost as if today's apologetic commentators are excusing those who can’t and don't.

Stewart Hosie, a member of the Commons Treasury select committee, says: ‘Of course credit card companies are businesses, but I would ask them to have not just attractive deals for new customers and transfers, they should make sure they have affordable rates all the time.

'There is no point offering great introductory deals if people cannot service that debt.'

Sure banks have a responsibility to foster well-run businesses. But no more. The fact that banks offered offered credit to 'sub-prime' borrowers was no more the cause of current financial crisis than the fact that millions of us were reckless in applying for loans we couldn't repay.

Credit cards should be avoided altogether by those struggling under the weight of debts and who have small and unstable disposable incomes.

I know critics will argue with me, but I feel that we only have ourselves to blame. It's our modern materialistic insistence on keep up with the Joneses - whether it be the latest iPhone, an expensive holiday to the Costas, a new car, or a shopping spree in New York (delete as applicable). I admit, I'm guilty of craving what I can't have. But that doesn't make it right.

Sure today’s credit card offers are ‘even more generous than before the recession’ and that's a bad sign from a banking point of view. But on a personal level, it shouldn’t matter. We should have learnt our lesson by now: only ever borrow on a credit card if you are 100% sure you can afford to repay, in full, when the amount is due.

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