- Investment Accounts replace savings accounts
- What is still the same?
- What is different?
- Key Advantages
- Ensuring flexibility for customers - early redemption
Under the modernised system, if you want to earn interest on your savings, you'll need to put it into an Investment Account.
You'll tell the bank how long you want to invest for (eg. 6 months) or how much notice you will give them before withdrawing the money (eg. 30 days, 1 year).
The money invested will not be guaranteed by the government, so the risk of this investment will be shared by the investor and the bank. This stops banks speculating with your money, confident in the knowledge that the taxpayer may bail them out if it all goes wrong.
Investment Accounts replace savings accounts
The second type of account is the equivalent of what is currently known as 'Savings' accounts. We call them Investment Accounts, for the sake of clarity and because it more accurately describes the purpose of these accounts - as a risk-bearing investment rather than as a 'safe' place to 'save' your money.
After the reform, the bank would need to attract the funds that it wants to use for any investment purpose (whether it is for loans, credit cards, mortgages, long term investing in stocks or short-term proprietary trading). These funds would be provided by customers, via their Investment Accounts.
What is still the same?
- Savings accounts will still be used by customers who wish to 'put money aside' or earn interest on their spare money (‘savings’).
- These accounts would still pay varying rates of interest.
- They would still be provided by normal banks.
What is different?
- At the point of investment, customers lose access to their money for a pre-agreed period of time. There would no longer be any form of 'Instant Access Savings Accounts'. This would be a legal requirement (although see later features that provide flexibility for customers).
- Customers would agree to either a 'maturity date' or a 'notice period' that would apply to the account. The maturity date is a specific date on which the customer wishes to be repaid the full amount of the investment, plus any interest/bonuses. The notice period refers to an agreed number of days or weeks notice that the customer will give to the bank before demanding repayment.
- The Investment Account will never actually hold any money. Any money 'placed in' an Investment Account by a customer will actually be immediately transferred to a central 'Investment Pool' held by the bank, and then be used for making various investments. At this point, the money will belong to the bank, rather than the Investment Account holder, and the bank will note that it owes the Investment Account holder the amount of money that they invested.
- At the point of opening an account, the bank should be required to inform the customer of the intended uses for the money that will be invested, along with the expected risk level. The broad categories of investment, and a consumer-friendly rating system for the risk of those investments, will be set by the authorities.
- The risk of the investment now stays with the bank and the investor, rather than falling on a third party (i.e. the taxpayer). In some accounts, the risk will fall entirely upon the bank, while on others a large proportion of the risk will fall on the investor. Any investor opening an Investment Account will be fully aware of the risks at the time of the investment, and those who do not wish to take any risk will be able to opt for an (almost) no-risk (and consequently low-return) account. See the later section on Investment Account guarantees for further details.
- Banks will be better able to manage their 'cash flow'. Since all the investment funds that will be used by the bank come from Investment Accounts, and every Investment Account has a defined repayment date (or a maturity date), the amounts that the bank will need to repay on any one day will be statistically far more predictable than under the current system.
For Investment Accounts with Maturity Dates, they will know the exact amount that must be repaid on any particular date - they will also know, from experience, what percentage of customers with maturing accounts will ask for the investment to be rolled over for another period (in other words, what percentage of accounts will not need to be repaid on the maturity date). With regards to minimum notice periods, they will know the statistical likelihood of an account being redeemed within the next 'x' days, and so be able to plan the payments that will come due on any particular day for up to 6 months into the future. In addition, because they have, on their loans-made side, a collection of contracts with specified monthly repayment dates and amount, they know almost exactly how much money they will receive on any particular date up to 24 months in the future (allowing for a small degree of variation due to defaults and late payments).
Consequently the banks' computer systems will easily be able to forecast cash flow (money coming in and out) over the next 6 months or so, with a much greater degree of certainty than under the present-day banking system, and identify any future shortfalls that need to be prepared for (for example, by scaling back loan making activity and building up a buffer). At the same time, banks will be able to identify periods when the money coming in will be greater than the repayments due to customers, and therefore increase loan making activity to soak up the surplus.
- The government and taxpayers will be neither implicitly nor explicitly responsible for losses of banks. Because the customer making an investment has explicitly agreed to accept the risks of the investment, there is no need (nor a justifiable case) for the government to guarantee any investments. If a bank makes bad decisions and loses money, the customers who provided the money for those investments will lose money. See further discussion of this under 'Risks to Consumers' below.
- By retaining the strong similarities with present-day 'savings accounts', we minimise confusion for the public. There are already many savings accounts with minimum notice periods or fixed term savings accounts of up to 5 years, so it is not a big leap to apply this to every type of savings account. We consider this to be easier for members of the public to understand than asking them to invest in mutual funds, or asking them to buy some form of investment certificate or investment bond from the bank.
Ensuring flexibility for customers - early redemption
Although the conditions of an Investment Account would mean that the customer loses access to his or her money during the Investment period, Investment Account holders can be given some flexibility in an emergency by allowing them to withdraw a certain percentage of their investment 'on demand'. With the right rules, this can be done without allowing the banks to create money, and without introducing instability to the modernised system.
The provision of these 'Early Redemption Options' is a little complex, so it is discussed in detail in the next section 'Early Redemption Options'. For now it is enough to know that customers who wish to save/invest, but may need to call upon the money in the future, can opt to take an 'Early Redemption Option' which would allow them to withdraw some of their money before the Maturity Date or Minimum Notice Period.
The bank would impose a forfeit for any customer 'exercising' this option (i.e. actually taking the money out before the agreed date), by either reducing or canceling any interest on the account, or imposing a fixed charge for withdrawing the money before the maturity date.