Although high street banks were hit by an extra £800 million tax bill this week from the Chancellor of the Exchequer and agreed to make £190 billion available for lending, many fear that bonuses in the billions insulate them from the pressures of everyday life.
Do we finance their easy ride? Banks have stopped paying interest on 57% of current accounts, up from 40% a year ago.
A Parliamentary select committee heard that even those on 'free banking' effectively pay £150 a year for a current account, in lost interest and overdraft charges.
But the dominance of the big banks is being challenged.
Metro Bank, which has raised £120 million from wealthy backers to become the first bank to open in England since 1830, opened its first branch in London's Kingsway last year, and hopes to float in 2012, with around 50 branches up and running within the M25.
"We are swamped with applications from small and medium companies which big banks can't help," says Metro's Mark Price.
Now Tesco Bank, another newcomer, is issuing a corporate bond to raise £50 million to £100 million from investors seeking secure, steady income, which is hard to find these days at building societies.
Originally a joint venture with Royal Bank of Scotland (RBS), Tesco Bank was taken into the sole ownership by the supermarket giant in 2010. Its new bond pays interest of 5.2% per year until repayment in 2018, a short period for a corporate bond.
Although each Tesco Bank bond costs £100, initial minimum subscription is £2,000. Investors pay the issue price if they get in before the book closes on February 18, because after the bond trades on the market from February 24 its price will vary, depending partly on yield and external economic factors such as interest rates.
Nick Raynor at The Share Centre, handling portfolios for 130,000 small investors, says: "There is an awful lot of interest from clients in this launch, although we are not among the five distributors."
"It may be psychological: people probably feel Tesco is safer than a high street bank in uncertain times."
Tesco Bank bonds can be held in an ISA or personal pension plan, so interest is tax free. An investor who hasn't yet used their ISA allowance for the current (2010/11) tax year could invest £10,000 for tax-free income of £520 per year until 2018.
That compares favourably with generous ISAs currently available.
The Post Office is launching one, two and three-year ISAs through its branches on minimum £500 deposits, paying up to 3.60% tax free over three years next Monday (February 14).
Patrick Gordon, senior investment strategist at brokers Killik & Co, one of the nominated distributors for the Tesco Bank bond, says: "Small investors rarely get into a new issue of corporate bonds at par."
"With a minimum investment level of £50,000 on most new issues, big institutions grab most offerings before they start trading."
"Many corporate bonds are trading above par at present, so buyers who invest after trading begins must accept a lower yield because the price is higher."
"By setting the minimum holding at £2,000, Tesco is giving a rare opportunity to the small investor."
Investors Chronicle magazine likes the idea of small investors getting a "look-in". And likes this issue too.
"It is fair to say that Tesco Bank carries none of the baggage that encumbers more established rivals, such as mortgage arrears, loans to Irish property developers and the toxic leftovers from overenthusiastic investment banking activities," it says.
So what are the risks?
Corporate bonds are an IOU issued by a company, so bond holders are exposed to the fortunes of that company. If a company hits trouble, bond values fall and investors face a loss.
Bonds, essentially, are for income seekers, usually older people living on savings and investments. They obviously cut the risk by holding a fund of bonds in various companies with differing degrees of risk.
Patrick Connolly, head of communications at financial advisor AWD Chase de Vere, says: "We never recommend holding bonds in individual companies."
"Tesco may be one of our strongest companies today, but so was BP a year ago. Three years ago, Royal Bank of Scotland looked a world-beater."
"No company is foolproof against a bad run, so investing in an individual share or bond means more risk in a portfolio than you need to have."
"For those who want bond exposure, we like funds like Fidelity Moneybuilder Income, M&G Corporate Bond Fund and Invesco Perpetual Corporate Bond Fund."
"All these hold stronger bonds of so-called 'investment grade', so if one company collapses, the lost income is swiftly made up by steady income from the rest."
"For older investors we suggest some corporate bonds in portfolios from £20,000 to £30,000, but younger investors might have £60,000 in their portfolios before they even look at corporate bonds."
"When you are still chasing capital growth, it does not make much sense to have much in corporate bonds."
Buyers of Tesco Bank bonds will tend to assume the parent company will never let its subsidiary get into trouble.
But on the bond markets, the best Tesco bond, maturing in December 2019, is yielding 4.8%. So the voice of experience is saying that Tesco Bank is marginally riskier than the main firm.
But many who sign up with one of five distributors of Tesco Bank bonds in the next week will probably be encouraged by the thought that their money could give bonus-rich bankers a harder run for their (exorbitant amounts of) money than before.
:: Information: Brokers Killik & Co (020 7337 0520 and www.killik.com) are among five named distributors of Tesco Bank bond, on 1% commission. Others are Charles Stanley, Redmayne-Bentley, Selftrade and Williams de Broe.
AWD Chase de Vere (0845 140 4014 and www.awdchasedevere.co.uk); The new Post Office ISA (0800 169 7500 and www.postoffice.co.uk/savings) pays 2.90% on a one year, 3.20% (two), 3.60% (three) with a £5,100 limit on 2010/11 subscriptions, and unlimited transfers from existing ISAs. It requires minimum opening deposit of £500, and no withdrawals are permitted within the fixed rate period agreed. Account can be closed early on payment of breakage fee.
Poundnotes
:: Since National Savings & Investments (NS&I) controversially dropped its highly popular inflation-linked certificates last summer, many people have watched the value of their savings slowly chewed away by the rising level of inflation.
Now BM Solutions is trying to fill the gap by issuing a savings bond which tracks the Retail Price Index (RPI) to pay RPI plus 0.25% for a fixed term of five years on balances of £500 to £1 million.
Kevin Mountford, head of banking at finance website moneysupermarket.com, says: "With inflation predicted to rise further in 2011, it is almost impossible to find a savings rate good enough to offset effects of inflation, so anything to help beleaguered savers has to be welcomed."
"Although the return on this account may be good while inflation remains high, when it starts to fall, the return may not be as good as some fixed rate savings accounts currently on the market."
"Locking money away with BM Solutions could be risky, as inflation is likely to fall during this period, while base rate will rise at some point."
BM Solutions: 0845 850 5000 and www.bmsolutions.co.uk.
:: Investors should not desert the biotech/healthcare sector because of the threatened Pfizer shutdown in east Kent, says the Association of Investment Companies (AIC).
It says one eminent fund, Polar Capital Global Healthcare Growth & Income Fund, is tipped for top-line growth in 2013, driven in large part by prospects in emerging markets.
David Pinniger, manager of International Biotechnology Trust is bullish too.
"While others see doom and gloom, we see tremendous opportunity," he says.
:: Investors fearful of inflation might look closely at The Mercantile Investment Trust, the £1.4 million trust run by JP Morgan Asset Management, where fund manager Mark Hudson hopes to head off trouble by cutting back holdings in sectors such as retailers, leisure and support services to go overweight in biotech, telecoms, water and commodity sectors.
Buyers through discount brokers like Hargreaves Lansdown or Chelsea Financial cut initial charges and possibly annual charges too.
:: With less than eight weeks left before the ISA deadline on April 5, data specialist moneyfacts.co.uk says the average cash ISA rate at 2.27% is the highest since January 2009.
The top five cash ISAs on the moneyfacts list are Nationwide BS e-ISA (2.90%, with 1,15% bonus until July 31, 2012); Kent Reliance (2.87% with 2.12% bonus until June 2012); Santander Flexible Issue 3 (2.85%, with bonus 2.35% for 12 months); Halifax Cash ISA Direct Reward (2.80%, including 2.30% bonus for 12 months) and Northern Rock ISA Saver (2.80% with 1.50% bonus for 12 months).
:: High five savers
Phone No Rate Account Period Deposit Interest paid
Coventry BS 08457 665522 4.75% Fixed Bond (128) 30/04/2016 £1 Yly
Aldermore -45 604 2678 4.75% (F) Fixed Rate Account Five Year Bond £1,000 Yly
Coventry BS ww.thecoventry.co.uk 3.05% eNotice 30 Days £1,000 Yly
Dunfermline BS 0845 733 6688 3.00% 60 Day Notice 60 Days (B) £1,000 Yly
Cheshire BS 0800 243278 2.95% 30 Day Postal Saver 30 Day (P) £1,000 Yly
:: Top five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 2.29% (rem) variable for term 60% £99 Yes
Hinkley & Rugby BS 0800 774499 2.44% for two years 75% £795 Yes
ING Direct 0845 032 8800 2.50% disc until 31/03/13 70% none Yes
First Direct 0845 610 0100 2.79% variable for term 65% £99 Yes
Furness BS 0800 220568 3.29% (disc) for three years 80% none Yes
Code:
*K- Operated by Internet, Telephone, or Post
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
