If you thought owning a Porsche and a weekend pad in the country were sufficient indicators of success, think again.
What about a euro bank account? Euro account holders are more likely than the rest of us to hop down to their flats in Cannes for the film festival, pop over to their Tuscan villas for a couple of summer breaks, or make the most of the skiing season.
The run-up to the January launch of the euro was accompanied by much hype about the need for businesses doing international trade to be able to deal in euros. Consequences for individual members of the UK population attracted less attention.
That wasn’t surprising, given that even within Euroland the euro is still a ‘virtual’ item, with no cash or coins due to enter circulation until 2002. Nevertheless, UK banks marked the euro’s birth by launching a range of products for the discerning personal customer.
Barclays, for example, now offers a euro current account, a euro deposit savings account paying interest on cash sums from 2,000 euros upwards (around #1,400), a euro loan facility and a euro mortgage.
Around 300 current accounts have now been opened.
‘Current accounts could be appropriate for anyone who gets paid in euros,’ says Barclays. ‘That could include people with separate properties abroad – people with flats in Spain or Greece for example. They can get paid euros straight into their euro account. Or it could be appropriate for the European business person who divides their time between, say Brussels and London, and expects to travel to a wide number of European countries.’ As for the other euro products, take-up has been slow: ‘We are talking about very, very small numbers.’ But these products are not aimed at the masses.
The Barclays euro loan offers sums from 2,000 to 20,000 euros with a fixed interest rate of 15.9% APR, but applicants must have an income in euros and they must open a Barclays euro current account. Again, with the euro mortgage, applicants must have an income in euros but be looking to buy properties in the UK.
Barclays anticipates that less than 5% of its personal customers will require such specialist euro products. ‘They are really designed for people with a direct need for them and the average man in the street does not have that,’ says Barclays.
NatWest has also introduced a number of euro products but again, the impact of the euro has been muted so far. ‘I would call it a soft landing for the personal market,’ says Nigel Winmill, head of the EMU programme at NatWest Retail Banking Services, without surprise. ‘In 1998, prior to the launch of the euro, we knew that out of the 40,000 personal currency accounts we had open, less than 6,000 were in Euroland currencies. Relative to our six million personal customers, that’s a tiny percentage.’
By the second week of February, around 400 euro current accounts had been opened and only a handful of NatWest’s euro-denominated higher interest savings accounts. These require a minimum balance of 2,500 euros, (about #1,750), and pay interest at rates ranging from 0.5% to 2.25%, depending on the balance.
‘We also offer fixed and variable-rate loans if people want to borrow in euros,’ says Winmill. ‘But unless people have a guaranteed income stream in euros we will advise them think carefully about borrowing in euros.’
This is because of the exchange risk involved when individuals with no euro income will have to buy euros with sterling each month in order to repay the loan. ‘If interest rates move in your favour you could benefit, but we are talking about risk here,’ says Winmill.
Not one customer had taken out a euro loan by the second week in February.
Clearly words such as ‘stampede’ or ‘avalanche’ do not apply to the activity surrounding these new personal finance euro products. But the banks have designed them for specific types of people.
‘We have two types of customer in mind,’ says Winmill. ‘The first is a person with income and expenditure in euros. Say I own a chateau in France and rent it out for 40 weeks of the year.
‘I receive the rent in euros and pay bills in euros. I don’t want to keep converting money from euros into sterling and back again. Instead, I receive it in euros, hold it in my account in euros, and then pay it out again. It’s a natural exchange-rate hedge.’
The second type of person Winmill envisages using a euro account is an individual who wants to hold value in euros for a period of time. ‘Say I sell the chateau,’ he goes on.
‘I deposit the million euro I receive with NatWest and hold it there because I think sterling is going to weaken against the euro in 12 months.’ Converting the euros at that time will ultimately result in a bigger sterling receipt for the former chateau owner.
Most of the UK population will never find themselves in the happy circumstances of our imaginary euro account holder above. ‘These people tend to be of higher income levels,’ says Winmill. Of course, anyone about to swap city life for a Peter Mayle-type year in Provence experience, could find that a euro account makes good sense. But few of us fall into that category.
Sportsmen and women and pop stars who spend large amounts of their time touring around Europe competing or performing could find euro accounts useful, assuming that they can make most of their transactions without actual coins and notes. But again, we are talking about a very limited group of people.
Impact on investment
Ian Woodhouse, a director in banking consultancy at PricewaterhouseCoopers, believes that the euro will have greatest impact on high net worth individuals in terms of their investments. ‘Wealthy individuals may choose to use the euro for investment purposes,’ he says. ‘Funds will switch or be created around the euro.
‘There will be an impact on investment patterns. But some people prefer to remain liquid and so look at opening accounts in the big currencies.’ Before the euro, their choice would have been confined to opening accounts denominated in, for example, the yen, US dollar or deutschmark.
‘Now they have the euro option,’ says Woodhouse. ‘What you look at is the interest rate. With the euro the rates are quite low, so people may not hold so much in deposits.’
As for euro mortgages, Woodhouse says: ‘It’s an interest rate play again.’ UK residents taking out euro mortgages are taking a gamble on how euro interest rates will move against UK rates, as well as the exchange rate.
‘You have to be pretty brave,’ he says.
Stephen Renals, marketing director of Granville Private Banking, believes unsophisticated investors should be wary about looking at the euro from an investment perspective.
‘These people are making a judgement on whether the pound will fall or rise against the euro,’ he says. ‘It’s a sophisticated choice. Individuals have to decide whether it fits their investment risk profile. Until we have a permanent link between sterling and the euro there is a risk there.
‘There is a lot of uncertainty and people shouldn’t yet look at euro accounts as an alternative to normal interest-bearing sterling accounts.’
Those rare people who do open euro accounts can always use them for one of the less pleasant tasks in life – settling their debts with the Inland Revenue.
‘The system isn’t particularly designed for individuals, but we would take their money,’ says a Revenue spokeswoman. ‘Having said that, we have had no individuals paying their tax in euros yet and only a handful of businesses have done so.’
The Revenue clearly isn’t expecting much interest from individuals wanting to pay tax bills in euros. So far, its only leaflet on the subject is targeted at businesses.
Have tax advisers noticed much interest in this option yet? ‘It’s pretty quiet,’ says tax specialist Linda Foster at Arthur Andersen. ‘In a year’s time there may be more interest. I expect our international clients will be the ones who will get into the euro.’
The same goes at Saffery Champness. ‘None of my clients have paid in euros yet,’ says national tax partner Peter Horsman. ‘They look for the cheapest way of getting the Revenue off their backs. If euros are the cheapest, which I doubt, then that would be a good reason to use them.’
As with many other potential uses of the euro, however, whether it is worth settling a tax balance with euros depends on the exchange rate at that time. The Revenue uses the rate in force the day the payment goes through its account, and of course that can vary.
Paying by cheque increases the risk of a shortfall or overpayment given the time lag between writing the cheque and the cash clearing the account.
Using an electronic cash transfer method would reduce that risk.
However you look at it, interest in euro products is limited so far among the UK population. Personal finance products denominated in euros do have their uses, but for a highly restricted group.
If you describe yourself as an international businessmen, a wealthy European jet-setter, or a travelling sports or pop star, then maybe a euro account could work for you.
But, until the UK joins Euroland, most of us need not worry. Unless Joe Bloggs wins the lottery and heads for the sun, good old sterling accounts are all he needs for now.
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