How the banking reforms will affect our money

The government's decision to break up the big banks is likely to cost us all dearly...

Last week, our coalition government released a White Paper in which it agreed with the recommendation of the Vickers Commission to break up Britain's big banks.

In a major overhaul of UK banking, the government intends to make savers' cash safer by separating retail banking (personal and commercial banking) from investment banking (so-called 'casino' banking). By doing this, the government hopes to avoid future taxpayer-funded bailouts if banks get into difficulty.

Ring-fencing our savings

This improved consumer protection will come at a price, however, because banks' retail arms will have to hold higher reserves of free capital. Indeed, banks will have to keep £1 of high-quality, liquid assets (cash and government bonds) for every £6 of assets they have.

When banks are eventually forced to increase these core capital ratios (no later than 2019), their profits will fall and their expenses will rise. Naturally, they will look to their personal and business customers to make up this shortfall. As a result, the cost of everyday banking is set to rise significantly.

Using my 20 years' experience of working with and for banks, here is what I think could change for the worse.

1. Lower savings rates

Savers will put at the front of the queue ahead of bondholders and corporate creditors if a bank goes under, which means bank funding will cost more. As a result, banks will look to cut the amount of money they pay to depositors by cutting savings rates.

Thanks to the Bank of England's base rate being held at 0.5% a year since March 2009, UK savings rates are already close to record lows. However, from 2015 onwards, savings rates could drop even further, making it more important than ever to shop around for table-topping savings accounts.

2. Monthly fees for current accounts

As the banks' headline, loss-leading products, current accounts lie right in the firing line. I suspect that a whole raft of changes will make current accounts more expensive, including higher fees and interest rates on approved overdrafts, the end of interest paid on credit balances, and the introduction of monthly fees.

Within the next five to ten years, 'free banking' could be dead as we all pay fees of up to £15 a month (£180 a year) simply to access our own money.

3. More expensive mortgages

Until the early eighties, building societies had a monopoly on domestic mortgages. Then new legislation allowed banks to grant home loans. Today, banks lend the lion's share of UK mortgages.

Given that a mortgage is the biggest financial transaction most of us ever undertake, home loans are certain to get more expensive. While mortgage rates will rise, I also expect add-on charges (such as application, administration and exit fees) to increase too. With some low-rate mortgages already charging fees upwards of £1,000, there is plenty of scope to ramp up these additional charges.

4. Costlier credit cards

Although the base rate is just 0.5% a year, a typical credit card charges a yearly rate of around 19% APR - that's 38 times as much. Even so, with bank funding costs going up, the interest rates charged by credit cards can only follow suit.

Furthermore, banks will look to increase the hidden fees cardholders pay for paying in foreign currencies, withdrawing cash, transferring balances and so on. Banks could even go so far as to shorten or withdraw the usual interest-free periods for 'full payers', which would spell the end of interest-free borrowing on plastic.

5. Pricier personal loans

At the peak of the credit boom, Brits took out six million unsecured personal loans a year. Thanks to the credit crunch, lending volumes have fallen to a fraction of this level, but it's still possible to get a best buy personal loan charging just 6% APR. Alas, when banks want to boost their falling profits, loan rates and fees will surely climb.

6. Higher insurance premiums

Thanks to their grip on the mortgage and loan markets, banks have a large captive audience of borrowers. In what's known as 'bancassurance', banks love to sell insurance policies to these millions of customers.

Thus, when banks look around for new ways to boost their profits, they are likely to raise our yearly premiums for home insurance, car insurance, life insurance and travel insurance. That's as a good a reason as any to be actively disloyal by shopping around for quality quotes and lower premiums.

7. Higher charges for investments and pensions

Lastly, banks already have a terrible record of mis-selling investments and personal pensions to unsuspecting customers. If they decide to raise the headline and hidden charges on these long-term savings plans, then these products will become even uglier to the British public.

A banking backlash

In summary, while our savings are set to become safer from 2015 onwards, banking charges will surely rise. As a result, we could be worse off to the tune of, say, £500 or more a year.

What a reward to taxpayers for bailing out bone-headed bankers!

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