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Banks 'could follow RBS lead and charge clients for holding deposits'

Published 22/08/2016

Another interest rate cut by the Bank of England could see British lenders follow Royal Bank of Scotland's example in charging clients for holding cash
Another interest rate cut by the Bank of England could see British lenders follow Royal Bank of Scotland's example in charging clients for holding cash

Another interest rate cut by the Bank of England could see British lenders follow Royal Bank of Scotland's example in c harging clients for holding cash, experts have warned.

As of Monday, 60 of RBS's institutional clients are being charged for select deposits - specifically those which are required by clearing houses for trades in the futures market.

RBS said it took the decision due to the low interest rate environment, following the Bank's August decision to slash the rate to a fresh record low of 0.25% as part of a post-Brexit stimulus package.

While retail clients were unaffected by RBS's decision, Richard Nelson - a senior fund manager at Royal London Asset Management - said a larger pool of deposits could end up being targeted by lenders in the months ahead.

"If the Bank of England moves to cut the base rate further, this could lead to further moves by banks to impose negative rates on client accounts in order to support their earnings," Mr Nelson said.

"If this occurs, some large firms may begin to look elsewhere to achieve a return on their most liquid assets in excess of the base rate," he added.

It might not be far off the mark, with economists expecting another rate cut at the Bank's November monetary policy committee meeting.

Investec has pointed to a fresh record low of 0.10%.

Investec's head of banks research Ian Gordon said RBS was always going to be more adversely affected by the August rate cut than its peers, given that a higher proportion of its business and personal accounts already offer "near-nil" interest rates.

"To put it simplistically, they had a lesser ability to pass on interest rate cuts than its peers," Mr Gordon said.

Still, it's unlikely regular retail clients will be charged for cash deposits any time soon, given the current levels of competition in the personal banking space, Mr Gordon explained.

Retail customers "will always be able to find a bank not charging them for benefit of depository," he added.

Laith Khalaf, a senior analyst at Hargreaves Landsdowne, was similarly sceptical of deposit charges creeping into retail accounts.

"It's unlikely to extend as far as personal customers, but it may extend beyond RBS and beyond the customers that they've identified so far," he said.

"So we're kind of at the top of a very slippery slope here, and it remains to be seen how far we go," Mr Khalaf explained.

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