Old habits die hard. When today’s consumers want to buy a financial product, they follow the same well-trodden path that their parents and grandparents took in past decades — straight to the high street banks.
However, many of the products that the big banks are selling represent poor value for money. This applies especially to add-on products such as payment protection insurance (PPI) and critical-illness cover, which the banks tend to sell alongside their mainstream businesses of mortgages, loans and credit cards.
Many financial commentators argue that the banks exploit their brand names, their high street locations and point-of-sale advantage to push products that are often inferior to the offers available from more specialist providers.
A classic example is the sale of PPI, which is designed to cover borrowers’ repayments on loans and credit cards if they are unable to work because of accident, sickness or unemployment. Last month the Office of Fair Trading (OFT), the consumer watchdog, ordered an inquiry into the industry after concluding that financial groups make excess profits of £1 billion a year from the sale of PPI.
Among those referred to the Competition Commission were the Big Four banks and HBOS, who between them account for more than 60 per cent of the seven million policies sold each year.
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The watchdog said that most consumers tend not to shop around for the best deal because they are sold PPI as an add-on when they apply for credit and there is little pressure on the banks to offer competitive prices.
A recent study by Defaqto, the financial research group, found that PPI for a £10,000 unsecured loan over five years would cost an average of £2,316 with the main high street lenders, but similar cover would cost only £245 with British Insurance, a niche player in the market.
A similar pattern emerges with the sale of life insurance. All too often borrowers taking out a mortgage with a high street bank decide to buy life cover at the same time without shopping around. The result is that they frequently end up saddled with unnecessarily expensive premiums.
Figures from Moneyfacts, the financial information group, show that £100,000 of life cover over 25 years for a male non-smoker aged 35 next birthday would cost £13.95 a month with HSBC Life and £14.30 with NatWest. However, similar cover from Asda can be bought for only £8.64.
Kevin Carr, of Lifesearch, the broker, adds: “Not only do banks tend to offer more expensive insurance, they rarely advise customers of the value of writing life policies in trust, so that the proceeds fall outside an individual’s estate for inheritance tax purposes. In contrast, an independent financial adviser will usually tell people about writing policies in trust and will also secure a cheaper deal.”
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In the same way, banks are not the cheapest or best- quality providers of critical- illness cover. The insurance, which is normally sold alongside life cover, pays out a lump sum if an individual has a serious medical condition diagnosed, such as cancer, a stroke or multiple sclerosis.
However, Mr Carr says that there is a significant difference between the cost of cover from the big banks and what is available elsewhere. A male non-smoker aged 35 next birthday seeking £100,000 of life and critical-illness cover over 25 years would pay £50.79 a month with Abbey and £52.65 a month with HSBC. In contrast, Legal & General would charge only £45.85 a month — a saving of more than £2,000 against the HSBC policy.
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But it is not just on price that the banks come off second best. Mr Carr says: “One of the key factors in determining the quality of a critical-illness policy is the number of conditions that it covers. The HSBC policy covers only 24, while Legal & General covers 32 and some cover as many as 42.”
Many bank customers looking to invest in the stock market are persuaded to buy the banks’ own funds. But regular studies of the track record of fund groups show that the high street banks are consistently among the laggards, with billions of pounds of their customers’ money in poorly performing funds.
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This is confirmed by the latest findings from Moneyspider, the fund research group. It analysed the overall performance of 55 fund groups over one, three and five years and did not place any of the high street banks in the top 20. But no less than four were to be found in the bottom ten: Halifax, NatWest, HSBC and Abbey National. Thousands of investors have large amounts of money tied up in the banks’ underperforming funds, which include the £1 billion Halifax UK Growth fund and the
£1.3 billion Abbey National UK Growth fund.
Bill Ross, of Moneyspider, says: “Almost every UK citizen has a relationship with the high street banks and entrusts them with their deposit accounts or home loans. But that does not mean that these companies have the skills to manage investment funds.
“With more than £7 billion of investors’ hard-earned savings languishing with these monstrous monoliths, it is time that investors took action and became more vigilant when making their investment decisions.”
One reason why banks are so keen to push sales of their funds and other non-core products, such as PPI and critical-illness cover, is that they are being squeezed hard in their more traditional areas of business.
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Justin Urquhart Stewart, of Seven Investment Management, says: “Basic banking services, such as the provision of mortgages and deposit accounts, have become commoditised — they are sold like baked beans — which means that new entrants can sell baked-bean-style savings and loan products just as well, if not better, than the banks.
“At the same time, regulators are cracking down on money-spinning bank practices, such as high default charges for breaching an overdraft limit or failing to make a credit card payment on time. The result is that the banks are looking to mine other lucrative seams of business, such as PPI or fund management.”
CASE STUDY: More cover for less cost
When Ros Harper, left, obtained a mortgage from HSBC, the bank took the opportunity sell her insurance cover for the £673 monthly repayments that she was making.
The insurance, which is known as mortgage payment protection, covers her home loan payments if she falls ill, suffers an accident or is made redundant.
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Ms Harper, a 42-year-old information analyst from Nunhead, southeast London, says: “I didn’t think too much about it at the time. I thought that all mortgage protection policies would cost roughly the same amount.”
It was only later that Ms Harper discovered that she could make a substantial saving on the £40 monthly premium that she was paying
for her cover with HSBC. She shopped around and was able to obtain a policy with British Insurance for only £26 a month.
Simon Burgess, of British Insurance, says: “We were able to provide Ms Harper with cheaper and better cover. HSBC’s payment protection did not cover the first 60 days of any claim, whereas ours did. We also threw in three months’ free cover.”
For more on consumer affairs visit www.timesonline.co.uk/consumeraffairs