THE REAL RISE IN FUEL BILLS

Electricity and gas suppliers are telling their customers how their bills will change from 1 April. And it is coming as a great shock to many.

The April rise is headlined as 54% - for every £100 you spend now you will spend £154 from April. The annual bill will jump by £693 pushing annual costs from £1277 a year to £1971 a year (they don't add up because of rounding). But these figures are averages and most people will have a different experience.

These increases are rises in the cap. Anyone who paid below the cap and now pays the full new cap will face a much steeper rise. That is particularly true of those coming off a one or two year deal with prices fixed one or two years ago. 

To understand how your bill will change you need to look at the actual charges. 

We pay twice for our electricity and gas. 

• A standing charge - an annual fee just for being connected which is collected at so much per day. 
• A charge for every unit of electricity or gas we use. 

So with two fuels and two different charges there are four different rises to be aware of. These figures are GB average for monthly direct debit customers. 

Default cap tariff from 1 April 2022 (including VAT)

	Standing charge per year			Unit price per kWh
	New price	Old price	Increase	New price	Old price	Increase
Electricity	£165.48	£90.81	£74.67 (+82%)	28.34p	20.80p	7.54p (+36%)
Gas	£99.35	£95.35	£4 (+4%)	7.37p	4.07p	3.3p (+82%)

Electricity: The average standing charge is rising from £90.81 to £165.48 a year. That is an increase of £74.67 or 81%. So even if you use no electricity but have a meter you will pay £3.18 a week for the privilege. That amounts to about one sixth (17%) of a typical bill. If you are a low user the standing charge can easily be a quarter of your bill. You cannot reduce it by putting on a jumper or turning down the thermostat.

The average price for a unit of electricity is rising by 36% from 20.8p to 28.3p. So boiling your kettle or running the dishwasher will cost you just over a third more from April. 

If you only use electricity then your costs from April should rise by around 40% compared with your costs from October 2021. The more you use the lower that percentage rise will be.  

Gas: the gas standing charge is rising very little - by just 4% to £99.35 a year, barely half the new price of the electricity standing charge. 

But the unit rate is increasing by a massive 81% from 4.07p to 7.37p. So your morning shower and your central heating will cost 81% more from April. Remember though that the unit price for gas is much less than electricity. So gas it is still the cheapest way to heat hot water, run central heating, or cook.

Prepay and quarterly

If you pay by prepayment meter or quarterly on the actual bill your charges will generally be higher, though the increase may be less.  

THE CAPPED PRICE

Just about everyone now pays the capped maximum price set by the regulator Ofgem. Competition in the energy market and switching supplier to find a better deal are all but over. 

Competition in the energy market and switching supplier to find a better deal are all but over.

The maximum capped price changes every six months in April and October. And we know what the rise will be on 1 April 2022. But the official figures of a £693 rise to £1971 - 54% higher - are confusing for several reasons. 

Way to pay

First, they assume you pay by monthly direct debit. That is the cheapest way to pay for two reasons. 

• There is less admin for the supplier to do and 
• Suppliers try to ensure customers pay a bit too much so they have surpluses which help with cash flow and investment.

Prepayment meters are more expensive. The headline rises for them are bigger - £708 a year taking your bill to £2017. The percentage rise is 54%. 

The most expensive way to pay is every quarter when you get a bill showing your actual consumption. If you pay that way the average annual bill will increase by £731 to £2100 - a 53% rise. 

These figures are also misleading because they are the annualised cost. In other words they represent what your cost would be if the price cap lasted for a year - which of course it will not, they last for six months. 

What you use

Secondly, the headline figures are worked out for what Ofgem calls a 'typical' household. That is one which uses 12,000 units of gas and 2,900 units of electricity. (A unit of gas or electricity is one kilowatt-hour or kWh. That mean you use one kilowatt for an hour. A kettle uses about 2 kilowatts so if you boil it for half an hour a day in total that is 1 kilowatt-hour or one unit of electricity used.)

If your use is different your price rise will be different. If you only have electricity - as around 4.5 million households do - then your bill will probably increase by less than 54%. If you use very little fuel your bill could well increase by more than 54%. 

Regional variation

Added to all these complexities Great Britain is divided into 14 energy regions, most of which are different from any other way of dividing up the country. Each region has its own prices. Unit costs can be 5% above or below the mean and standing charges for electricity as much as 29% different. The official Ofgem document that sets out the cap has 252 separate boxes to hold all these different prices. 

WHY ARE PRICES RISING?

Unit prices

Most people know that the price of gas has risen strongly over the last year. And now Russia has gone to war with Ukraine that may well get worse. So the next increase in October 2022 may be very high as well.  

The UK of course is surrounded by large gas fields in the North Sea. But the firms that extract that charge the world market price. As that rises we pay more and the firms like Shell and BP make bumper profits.

A lot of our electricity is generated by burning gas. So the price of that is rising too. We do have large wind farms and a lot of solar panels. But the electricity they produce is expensive - not least because to get them built the Government offered premium prices or subsidies to the firms that invested in them. 

we are stuck with world prices for gas and electricity

For now, we are stuck with world prices for gas and electricity. As demand rises and supply does not follow the basic law of economics means that prices will increase.

The standing charge

The electricity standing charge is going up hugely - by £75 a year on average a rise of 82%. This charge used to cover just the fixed costs of providing the wires and pipes to our home, maintaining them, and reading our meters. But not any more. The electricity standing charge in particular has many other costs added onto it. It includes a share of what are called 'policy costs'. These are levied on us to cover the extra cost to energy firms of delivering a greener future. The cost of the smart meter programme for example adds £18 to the average capped bill, for example. The Government makes energy firms do these green things and the cost is mainly added to the electricity standing charge. 

This year at least £34 of the electricity standing charge is to cover some of the cost of reimbursing the big energy suppliers for taking over the customers of the 27 small firms that went bust in 2021. Worse is to come. In Autumn 2022 there will be a £200 discount on every electricity bill. The Government has lent the industry over £5 billion to make those discounts. But that money has to be repaid and from April 2023 £40 a year will be added to the electricity standing charge to collect that repayment from customers. 

ECONOMISING

This blogpost is not the place for more than a few brief hints about cutting your use of electricity and gas. 

Switch off lights, wear an extra jumper, turn down the thermostat, dry clothes in the air, use the dishwasher only when it is full. Remember that any device that uses electricity to heat something up is expensive to run. So only put enough water in the kettle for the pot of tea you are making. Electronic items use very little electricity but turn them off too when you can. 

any device that uses electricity to heat something up is expensive to run

Gas boilers are the cheapest way to heat water up for washing and central heating. So use gas where you can. But keep radiators turned down and shorten your shower. Baths use much more water so more expensive.

Keep windows shut. Consider draughtproofing, lagging, loft insulation, better fitting doors and double-glazed windows. They can all be expensive to do. But in the long term will save you money. 

High energy costs will be with us for a very long time.

version 1.02

27 February 2022.

TRIPLE LOCK RISE AFFORDABLE

A report by the Government Actuary published on 17 January shows that the Government could have kept the triple lock and increased the state pension by 8.3% in April without serious damage to the National Insurance Fund in the next five years.

Figures in the report show that if the Government had raised the basic and new state pensions by 8.3% in line with earnings instead of prices the surplus in the National Insurance Fund would still have been more than £50 billion in 2022/23 and remained above £50 billion in 2026/27. That is more than double the surplus needed by the Fund to operate safely. 

The Government Actuary publishes a report each year into the cost of uprating benefits in April. It calculates the effect on the National Insurance Fund of the uprating and the surplus left in the Fund at the end of each tax year until 2026/27. This year's uprating in April 2022 will raise the state pension and other benefits by 3.1%. But the Actuary also looked at the effect of raising the basic and new state pension in line with earnings which had grown by 8.3%. 

Under the triple lock promise in the Conservative Manifesto the basic and new state pensions are increased by the rise in prices or earnings whichever is higher, There is a minimum increase of 2.5% if both are below that figure. In October 2021 official statistics showed that prices rose by 3.1% in September and earnings by 8.3% in May to July. Those are the figurs used to uprate benefits and pensions the following April. 

Under the triple lock promise in the Conservative Manifesto the earnings figure of 8.3% should have been used to increase the basic and new state pensions in April 2022. Instead the Govenment passed a law so that the state pension rose in April in line with the 3.1% rise in prices not the 8.3% increase in wages. That decision was criticised at the time and that has grown now the Bank of England predicts price inflation to be 7.25% in April.

The Actuary's report reveals that under the Govenment's plans the surplus in the National Insurance Fund will grow steadily over the next five years from £42.5 billion in 2020/21 to £60.4 billion in 2022/23 reaching £76.2 billion in 2026/27. That will be more than three times the surplus needed to safely operate the Fund without the Teasury stepping in with a grant.

In separate calculations the Actuary finds that if the triple lock promise had been kept the surplus in the Fund would be £25.4 billion lower in 2026/27 - which my calculations show would leave a surplus of £50.8 billion and represent 36.5% of benefit expenditure that year. 

The Actuary's rule is that a surplus of 16.7% is needed to operate the Fund without the need for a Treasury grant. So on these figures the surplus under the triple lock would still be more than double the required level. 

The Department for Work and Pensions told me

"The one-year move to temporarily suspend the Triple Lock ensures fairness for both pensioners and taxpayers...The new legislation is a one-year response to exceptional circumstances of the pandemic and we plan to return the earnings element of the Triple Lock next year."

All figures rounded.  

Paul Lewis

15 February 2022

version 1.01

Deflating Inflation

Why is it so hard to measure changes in the cost of living?

A battle is raging over inflation. Not the public one over how to defuse the looming cost of living crisis. But a much deeper one about how inflation is measured and if that can be changed retrospectively. 

The evidence for the battle is published every month by the guardians of truth in official numbers – the Office for National Statistics. Its consumer prices bulletin publishes not one but three different rates of inflation. The latest batch revealed in January were 4.8%, 5.4%, and 7.5%. 

The range is massive. The highest is 2.7 percentage points above the lowest. If your pension was linked to that the rise would be 56% more than if it was linked to the lowest. Yet the government’s latest plan is to do just that. 

The lowest rate is also the ONS’s preferred measure called CPIH which stands for Consumer Prices Index (including Housing). It has been criticised for using changes in rent as a proxy for housing cost changes for owner occupiers. It is the index which now tops ONS press releases and briefings and to find any other measure requires research or even downloading a spreadsheet. Despite that the media doesn’t generally report CPIH and it is not used in the real world for any practical purpose except by Ofwat for setting controlled water prices. 

Until 2011 there just one main measure of inflation – the Retail Prices Index or RPI. It is the highest of the three and was used since its introduction in 1947 for any official calculations relating to the cost of living including wage bargaining. It is so prevalent that it has been back calculated by ONS boffins to the year 1270 when Edward I was on the throne, and it is still used for historical calculations to tell us what £100 in Victorian or Elizabethan times is ‘worth’ now. 

But statisticians said the RPI was flawed and wanted to replace it with the more internationally favoured measure called the Consumer Prices Index or CPI (no H yet). The Government gladly accepted their advice largely, cynics say, because CPI was lower than RPI. That is due principally to what is called the formula effect. The RPI aggregates multiple prices using a simple arithmetic mean or average – add them up and divide by how many there are. But CPI uses the geometric mean – multiply the prices together and take the n^th root where n is the number of items. For positive numbers that always gives a lower number. Since January 2015 the average reduction in inflation due to the formula effect is 0.81 percentage points. 

CPI was published from 1997 and from 2003 it was used for the Bank of England inflation target. But it was only in 2011 it became the official government measure of inflation and was used to raise benefits which saved a cumulative £2 billion a year. It has since come to replace RPI for other things such as tax allowances – when they are not frozen to save even more money. 

Two years later RPI was dealt another blow when the National Statistics Authority declared it was no longer what it calls a National Statistic. The Authority and ONS both advise against using RPI. 

Nevertheless ONS publishes RPI each month because it is used in many calculations not least where it saves the Government money such as raising controlled rail fares and the interest charged on student loans. It is also used to increase various duties. Car tax – VED – will rise by RPI in April as will Gaming Duty and Landfill Tax. 

It is also used in the contracts of many company pensions which specify RPI for the annual cost of living increase. Most pension schemes where the contract does not specify RPI have made the change to CPI – a welcome relief for the fund if not the pensioners. But where RPI is specified the Supreme Court ruled in November 2018 that it cannot be changed. 

The biggest problem for the Government is the £819 billion pounds-worth of index-linked gilts. These inflation proof government bonds account for nearly a quarter of all gilts and are linked to the RPI – a phenomenal return now that RPI is 7.5% compared with a 25-year standard gilt issued in January 2021 which paid just 0.875 per cent. 

The Government now plans to keep RPI but change the arithmetic so in effect it becomes CPIH. That will happen with the RPI issued in February 2030. Holders of index-linked gilts and others will not be compensated – a saving, says Insight Investment, of £100bn to the Government over the life of the bonds and a cut in the value of pensions by 10 to 15 per cent. 

When it does that it is hard to see the CPI surviving as the measure used to uprate benefits and tax allowances. CPIH – the lowest of the three measures – will have triumphed, albeit under the name RPI.

In December the High Court gave three major pension funds, which have 450,000 members between them, the right to challenge these plans. Their judicial review hearing is expected in the summer. The Government’s defence could be published as soon as this February. 

The battle for RPI continues. 

This blogpost is adapted from a piece first published in FT Money 15 January 2022. 

v.1.00

28 January 2022

YOUR HOME AND CARE HOME FEES

 

 

SPENDING THE WINDFALL

 Don’t resent selling your home to pay for care – you didn’t pay for most of it anyway.

To read the headlines you would think that the moment an elderly person goes into a care home they are forced to sell their own house or flat to pay the costs of up to £1000 a week or more. It is not true. No-one – I repeat no-one – can be forced to sell their home to pay for their care. Many of course are led to believe they must, and some choose to do so, but no-one has to.

It is sad that as the details of the Government plan to cap care costs is debated the phrase 'people have to sell their home to pay for care' is being used - ignorantly - on both sides. 

The Government made the true position clear when it launched its plan in September to cap the cost of care. It reminded us that “the existing service allowing people in need of residential care to defer payment of their care home fees…means that people have the flexibility to avoid selling their home within their lifetime”.

This deferred payment agreement is law only in England but in the other countries of the UK similar arrangements can be made. In England anyone with capital (apart from the value of their home) of £23,250 or less can apply for it. The care home bill ticks up while they are alive and is paid from their estate after they die. Interest is added and some local authorities add fees too. The people who eventually pay the bill are the heirs through a reduced inheritance.

A deferred payment arrangement may not be necessary. The value of the home is not counted at all for the care home means-test if a spouse or partner lives there. It is also ignored completely if a relative – on a broad definition – who is over 60 lives there. There is also discretion to ignore the value if a carer or a younger financially dependent relative lives there. As a result, the value of many homes is ignored and the council pays for the care.

It is also possible that the NHS will pay the whole cost without a means-test. It is called NHS Continuing Healthcare and applies if the person is discharged from hospital into residential care and their primary reason for needing that is medical. In Scotland it is different and called Hospital Based Complex Clinical Care. It is hard to make the NHS pay and may require legal help. But the law is there and it can be done.

Sell your home

But why not sell your home anyway and use its value to buy yourself the best care in the nicest place that you can afford? The value of your home is yours and any decent heirs would rather you used the money to make yourself as comfortable and happy as you can be in your final years. The average time in a care home for people over pension age is around two and a half years so there may still be plenty of money left for them.

People say to me ‘I worked hard for that house, paid the mortgage for over 40 years. Why should I lose it because I need care in my very old age?’

Legally of course it is your money. But if you had a mortgage 40 years or more ago then that was subsidised by other taxpayers. In the 1970s you could set mortgage interest off against your income tax up to any amount and at your highest tax rate. From 1983 it was called MIRAS and restricted to smaller loans and basic rate tax. That was abolished in 2000 saving other taxpayers £1.4 billion a year. If your mortgages have included years before 2000 then some of your mortgage interest was paid by other taxpayers.

As for working hard, most of the value of your home is a windfall caused by house prices rising faster than any other inflation measure. From 1981 to 2021 prices measured by the Consumer Prices Index have trebled and wages have risen almost twice as fast. But house prices have soared tenfold. The Nationwide house price index shows the average UK home was worth £265,700 in June 2021. Forty years ago it was worth less than a tenth as much – £26,381.

If house values had risen with consumer prices your home should be worth £80,500 and if they had gone up with pay it would be worth around £150,000. Either way you have a huge windfall gain – up to £185,000 compared with prices – for which you did no work at all. It was created by society failing to build enough homes, controlling interest rates, and subsidising mortgages.

So do not be resentful or afraid to use that tax-subsidised windfall gain to give yourself the best last few years you can. Your kids will survive without it.

This blogpost is adapted from an article which first appeared in The Daily Telegraph on 6 November 2021 and a few days before online.

Vs 1.00

25 November 2021

DECOMPLEXIFICATION IS THE KEY TO FAIR FINANCES

Business hates competition. And it makes products complex hoping we will make the wrong and more expensive choice. 

Banks make money because they are better at arithmetic than their customers. They know that if they fix monthly repayments on a credit card at 2 per cent of the outstanding amount with a minimum of £5 it will take 25 years to clear a £2,000 debt and they will have been paid £3,500 in interest.

They know that after 43 years of charging 1.5 per cent a year on a pension pot with 4 per cent growth they will have taken the equivalent of a third of the pot. Even for the section of the population that is not functionally innumerate those are difficult sums.

And where the arithmetic could be simple the banks devise ways to make them complex. A theme that has run through my working life is explaining complex things to people in a simple way. Over the years I have come to believe that this process of making things complicated — complexification, as I call it — is deliberate. And it is anti-competitive.

Imagine if you went to fill up your car. The local garage is Esso and the price is 136.9p a litre. But Sainsbury’s sells it for 132.9p a litre. So you drive the extra mile to Sainsbury and save yourself a couple of quid.

Suppose instead that your garage charges 129.9p a litre plus £5 to enter the forecourt. That would be dearer. But if you agree to make it your petrol station for the next 10 visits it waives the forecourt charge. Is that still cheaper than Sainsbury’s at 132.9p, which charges you £2 to visit and then gives you back £1 if you fill up for two consecutive times?

Such an approach would be retail madness. But it is often the way you are charged for personal finance products.

There are nearly 5,000 different residential mortgage products on the market. Far too many to choose from rationally. Fixed rates, discounted rates, variable trackers, extended tie-ins, cashback, discount on legal fees, high lending charge, and nearly always a fixed upfront fee of between £495 and £1,995. Which mortgage is best should be a simple question — who charges the least? But these complex deals are a mixture of bets on the future of interest rates — which even professionals get wrong — and simultaneous equations.

On a loan of £200,000, is 1.09 per cent for three years with a £999 fee better than 1.56 per cent over 5 years with a £1,995 fee? And what if grandma comes through and you only need borrow £185,000? Without knowing how to use a spreadsheet it is impossible to calculate.

But what the lender and the broker do know is that at the end of two, three or five years on a fixed rate you will be back to borrow it all over again. If you stay in your home for a typical 20 years you could take out anything from four to 10 different mortgages on it. Ker-ching!

Instead of businesses competing fairly on price — that can of beans is 55p, this one is 62p — they make the sums so difficult that no one can solve them, hoping that many customers will make the wrong choice and pay more than they need.

"complexification destroys competition 

by rendering rational choice impossible"

A population that is better educated in financial matters could become a challenge to the industry which is why I support the FT initiative to promote financial literacy at all ages. But unless the banks are forced to make things simple, progress will be very slow.

Business has always hated competition. Elizabeth I made the Crown's fortune by selling monopolies to individuals and organsiations. The City of London, home to our banking sector, was founded on the trade guilds which policed quality but whose hidden agenda was to fix prices.

Nowadays we tend to think competition is good. The Financial Conduct Authority has a vision of a world where “firms are competing vigorously in the interests of consumers”. We even have the Competition and Markets Authority to police it all, though if businesses liked competition we would not need one!

The CMA’s predecessor, the Office of Fair Trading, ruled in April 2006 that credit card providers could not penalise customers who missed a payment. Any fee they charged could not be more than the late payment actually cost them. But then the OFT added this fateful statement: “We do not propose at present to consider legal action where charges are set below £12.” Within days all card providers had cut their charge to — guess what — £12. I am not, of course, accusing the banks of illegal price fixing. It was just a happy coincidence. And an unhappy one for competition on late payment fees.

Firms look for ways to defeat competition rather than embrace it. The only way to force them to be fair and competitive is through rules

The Financial Conduct Authority has tried to impose general overarching principles to stop the banks misleading people. Under the current rules they must show that “fair treatment of customers is at the heart of their business model”. Despite the FCA’s £600m a year budget it is clearly not working because now it wants to introduce a Consumer, Duty where firms will put themselves in their customers’ shoes and ask “would I be happy to be treated in the way my firm treats its customers”. It is not clear from the consultation paper how that will be enforced or how its outcomes will be reported to the public.

My experience in 40 years of writing about personal finance is that firms look for ways to defeat competition rather than embrace it. The only way to force them to be fair and competitive is through rules. When you make a part payment off your credit card the bank must now take it off the balance on which it is charging the highest interest rate.

In the past, payments were taken first from the debt with the lowest interest rate — sometimes as little as 0 per cent — leaving the expensive debt ticking away at 29.9 per cent. That was not treating customers fairly but that principle did not stop the practice. It took a specific rule change in 2014 to do that.

Decomplexifying financial services means banning the factors that make things complex. Ban upfront mortgage fees so that interest rates are comparable. Ban small percentage minimum repayments off credit card balances. Root out all the clever ideas that complexify our finances. Because complexification destroys competition by rendering rational choice impossible.

This article first appears in the Financial Times 5 October 2021

FOR WHOSE BENEFIT?

 

 

Millions of people on benefits will get just a few pence a week more in smallest uprating

The week beginning April 12 was a big one for people who are so disabled they need help with their bodily functions from another person by day and by night. They got an extra 60p a week on their Attendance Allowance – less than the price of a 2^nd class stamp to write and complain. Their carer will get an extra 35p a week which, for the minimum 35 hours they must do their caring, amounts at best to an extra 1p an hour. In total their weekly stipends will creep up to £89.60 and £67.60 a week. A carer who tries to work their way out of poverty loses all their carer’s allowance the moment their wages rise above £128 a week – 14 hours at minimum wage if they are aged 23 or more.

Other benefits rose by similarly inconsequential amounts. Those on employment and support allowance got 35p a week more, slightly less if they are under 25. People on long-term incapacity benefit because they are, guess what, incapacitated over the long term, were given an extra 55p, barely enough for a pint of semi-skimmed.

Child benefit paid to millions of mothers will rise by just 10p for the oldest child and 5p for each other – less than the cost of a visit to a public toilet.

Even widowed mothers, once in the pantheon of those we should help, will see their allowance rise by just 60p a week to £122.55. They are lucky. More recently bereaved spouses will get zilch. Bereavement Support Payments, which began for deaths from 6 April 2017, are only made for eighteen months so the Government has seen no need to raise them at any of the four Aprils since they were introduced. Many other amounts are also frozen. The benefit cap – the maximum allowed which generally cuts the benefits of people with high rents and several children – remains where it was fixed five years ago at £20,000 a year. The amount of savings which denies entitlement to means-tested benefits is still frozen at £16,000, an amount set fifteen years ago. The Local Housing allowance – the maximum amount of rent that can be paid – has also been frozen for 2021/21. So as rents rise, tenants are poorer.

I am old enough to remember the trouble Gordon Brown got into in 1999 when he announced a rise in the state pension of just 75p a week. That is more than the increase in every working age benefit rate on 12 April this year. But there is no outrage this year, even though Brown’s 75p pension increase was the correct amount according to the same rules. Each April benefits rise in line with the inflation rate the previous September. In 1999 that was 1.1%. In 2020 it was 0.5%. That 75p rise would be worth £1.77 in today’s money.

There have been two changes to that rule. From 2011 the CPI replaced the RPI as the measure of inflation, a change which reduces inflation by almost one percentage point just because of the different arithmetic the two measures use. Indeed, in September 2020 while the CPI was 0.5% the RPI was at the 1999 Brownian level of 1.1%! Five years later austerity kicked in and most working age benefits were frozen from 2016 to 2019. Over that period prices rose 7.4% (CPI) or 10% (RPI).

Even pensioners are not exempt from this parsimony.  Of course, at the moment the old basic state pension and the flat rate new state pension are increased each year by the magic triple lock – forged from the Gordon Brown embarrassment and tempered in the fire of six general elections. Those amounts are raised each year by the highest of the rise in prices or wages or 2.5%. This year with pay increases negative in the autumn and a 0.5% rise in the CPI, the default rate of 2.5% was used. So from April 12^th the basic state pension went up to £137.60 a week – a rise of £3.35, almost ten times the increase paid to a carer, and the new state pension is now £179.60, a full £4.40 a week more – equal to the rise in child benefit for a mother with 87 children. But pensioners are not free of the CPI shackle. Only the two headline rates get that triple lock treatment. The extras – SERPS and its enfeebled lookalike state second pension, the old graduated pension, the protected amount paid with some new state pensions above the flat rate, and the extra for deferring your claim which is paid (at different rates) with old and new pensions, all rose by 0.5%. As a result many state pensioners will see an increase in their weekly benefit of less than 2.5%. A rise of less than 2.5% was also given to those who get the means-tested pension credit.

I recite all these facts partly because I am the Mr Gradgrind of financial journalism “Facts alone are wanted in life. Plant nothing else….You can only form the minds of reasoning animals upon Facts…Stick to facts, sir!” (Charles Dickens, Hard Times 1854, Chapter 1). But mainly because they are little known, seldom acknowledged, and rarely understood. As Thomas Cranmer said – read, mark, learn, and inwardly digest.

A version of this blogpost was first published in Money Marketing 

29 April 2021 

vs 1.00 

Banks must act to control fraud epidemic

Don’t think you are too clever to be conned

An epidemic is sweeping the UK. Laying low the old and vulnerable, damaging healthy adults for life and undermining our belief in the systems that are supposed to protect us. It is caused not by a few strands of RNA, but by an intelligent life form. Clever, resourceful and agile, it worms its way into our brains, distorts our perception of reality and makes us pleased to give our money to thieves. 

In 2020, nearly 150,000 individuals had £479m taken from them by this plague. And that is just a small subgroup of the most common form of crime in Britain — fraud. It may be costing us billions of pounds a year. No one knows because much of it is never reported. What could be more embarrassing than admitting you were fooled by thieves into giving them the keys to your safe? Fraud is the crime we are the most likely to experience. It is out of control. And no one seems able to stop it. 

This type of scam begins with a frightening cold call. BT says your router is insecure and you need to pay to secure it. HMRC calls to warn that you are about to be prosecuted for tax evasion if you do not pay a sum into court now. Your bank reveals that your account has been compromised and the money must be moved somewhere safe. They panic you, threaten you, and if you are still sceptical they ask you to check caller ID. When you do it will show the correct number for BT inquiries, HMRC or even the fraud reporting line for your bank. 

These genuine numbers are sent by a technique called number spoofing, which allows the thieves to send any number they choose to the Caller ID system. One top law enforcement officer told me on Money Box recently “do not trust what you see on caller ID”. But people do and then agree to transfer money to the thieves or even give them the keys to do so themselves. Some steps have been taken to bar some numbers from being spoofed but the gov.uk website is a rich source of official numbers for thieves to harvest. Ofcom says there is no general solution to the problem of callers sending a false number. 

Until one is found the thieves will wrap this cloak of credibility around them. It would matter less to customers if they were compensated for being victims of this professional psychological warfare. A recent code was supposed to ensure that blameless victims would have their money reimbursed by the banks. But the latest figures from UK Finance show that for the 139,104 thefts that fell under the code in 2020, only 45 per cent of the £312m stolen was given back to customers — just £141m. That is a lot better than the 19 per cent reimbursed before the code began in May 2019. But evidence from dozens of people who still come to me after losing life changing sums indicates that banks are using the code itself to justify not paying. 

One popular disclaimer is that under paragraph R2(1)(a)(iii) the customer did not heed an “effective warning” about the transaction before they made it. That raises the question — can a warning be effective if it is not heeded? Another is paragraph R2(1)(c)(iii), under which the customer did not have a reasonable basis for believing the person they were paying was legitimate. But would anyone hand over thousands of pounds to someone they did not believe was legitimate? The code was not intended to be a playlist of excuses not to pay. 

Some banks are worse than others. The Payment Systems Regulator revealed last year that two out of eight banks in the code paid customers nothing in 96 per cent of cases. Even the best only reimbursed 59 per cent in full (the average was one in six). The regulator refuses to identify which banks are the worst, keeping that vital information secret from the people who need it: their customers. 

 Contrast this with TSB, the one major high street bank that is not a member of the code. It has its own “fraud refund guarantee” and says it repays in full 99 per cent of customers whose money has been stolen in this way. The regulator is now consulting on similar mandatory rules that would reimburse all customers who were not implicated in the crime. That would concentrate the minds of the banks. They already meet all losses from unauthorised thefts, such as card fraud or remote banking fraud, and these are being controlled, falling by 7 per cent in 2020 according to UK Finance. But losses to authorised payment frauds, where less than half are reimbursed, increased by 5 per cent with total incidents up 22 per cent. If the banks had to repay everyone it might make them more interested in stopping these thefts. 

The uncomfortable truth for the banks is that they are at the heart of these crimes. They allow thieves to open and operate current accounts and then use the faster payment system to receive the money and move it rapidly between accounts until it vanishes. In 2020, 96 per cent of the money stolen this way went through the faster payment system, a total of £398m, up 19 per cent on 2019. 

 I put my hand up here. In my early days on Money Box I championed faster payments. Why does it take three days to move money in the 21st century, we asked. And where is our money for those three days? Answer: earning interest for the banks. By 2008 the banks were shamed into setting up a new infrastructure that moved money at once and, crucially for the crooks, beyond recall. 

Perhaps now is the time to introduce a pause in the system so that when we transfer money to a new payee there is a delay of, say, 24 hours before the payment is made. One of the characteristics of the people whose money is taken is that within at most a few hours the psychological drug that made them credulous enough to co-operate with the crime wears off and they think: “****! I’ve been robbed.” But even after a few seconds it is too late to undo the transfer. 

 Preventing number spoofing, making the banks liable and introducing a pause for new payees would go a very long way towards ending most of these crimes. Meanwhile, there is one impenetrable barrier to them. End the call. No one ever lost money by doing that. And do not think that you are too clever to be caught. No one is. Once you engage, you are hooked. Their silver tongues will wrap around your brain while their digits enter your bank account and fish out all your money. So end the call.

This piece originally appeared in the FT early in April.

Paul Lewis

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