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An interesting new perspective on an emerging banking trend in the UK emerged this week as financial advisers issued warnings about some UK bank accounts which charge monthly fees in exchange for extra benefits.

Approximately 7 million people each spend up to £480 a year to have these accounts which also offer services such as free insurance or a special savings rate. However, experts are now warning that the perks that come with them can be poor value for money, or may be unsuitable.

The accounts are profitable for lenders when customers are in the black and so banks keen to rebuild their profits are anxious to get their customers to switch to the paid-for accounts, which are more profitable for the lenders than providing free banking for customers who do not get into arrears.

The research company Defaqto says the number of such accounts offered has almost doubled in the last four years and it is forecasting a big marketing push by banks, partly because the recent Budget guaranteed every adult the right to go into a bank branch and open a free basic account. Defaqto reviewed 119 different current accounts, providing 32 different benefits.

The City regulator, the Financial Services Authority (FSA), has said that some packaged accounts can offer great value. However, it added that there was a risk that banks keen to boost their income might mis-sell products which are not suited to customers’ needs, or could be bought more cheaply separately.

The Financial Ombudsman Service, which adjudicates on bank complaints, agrees and has already received 500 complaints about paid-for accounts.

People are either saying that they did not understand how much they were paying for the benefits, or that they never realised there were limitations to the cover provided. In the case of mobile phone insurance, for example, this may already be available free on an existing household insurance policy.

It is important that customers weigh up the monthly fee of between £5 and £40 with the benefits offered. Added value accounts suit some but not others and there is a big variance in what is available. For example, travel insurance might not cover your children or a visit to the USA.

While the banks agree that customers should study the suitability of an account carefully, they, surprisingly, reject any suggestion that such accounts are generally mis-sold. The British Bankers’ Association (BBA) said the banks had a range of offers to suit a wide variety of different kinds of customers.

Banks like to call these products “added value accounts” but an increasing number of customers do not agree with that description. The consumers’ association Which? recently numbered them among the top ten “useless financial products”.

However, the experts say there are times when such accounts can be useful. Defaqto cites the example of current accounts which provide travel insurance for older people, who might find such insurance more expensive if they were to buy it separately.
So the best advice is, as always, to check the terms of any account carefully, to ensure that the perks being paid for are not only good value compared to being bought separately but will also meet needs following a subsequent claim.

I expect this is an area about which we will be hearing much more in the future.

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Debt figures released this week by the Insolvency Service show that there is a clear divide in the numbers of personal insolvencies occurring in the North and South of the UK. The data for England and Wales gives a breakdown of the geographical areas in which personal insolvencies are most prevalent.

The highest rate of personal insolvencies such as bankruptcies and individual voluntary arrangements was in the North East of England in 2009 while the lowest level was in London.

Personal insolvency numbers are currently at record highs due to so many people finding themselves out of work and with debts in the downturn.

The new figures show that the highest levels of insolvencies were in the North East where there were 38.1 personal insolvencies per 10,000 adults in 2009. This was higher than the average in England and Wales of 31.1 and considerably higher than the lowest at 19.6 in London.

The North East and London were, respectively, also the locations for the highest and lowest rates of personal insolvencies in 2008.

Analysts have pointed out that the high figure is unsurprising as the region had higher than average unemployment even before the recession. The downturn also his the regions construction industry particularly badly.

However, in 2008 the South West of England was at the highest level. This region remains the second highest in 2009 with 35.9 personal insolvencies per 100,000 of the population.

On a more local level, Ealing and Wandsworth in London had the lowest personal insolvency rates, apart from the City of London, although the numbers were up slightly in 2009 compared with 2008.

Typical of the average across England and Wales are the Wirral and north-east Derbyshire.

At the top end of the scale are Derwentside, Easington and Cannock Chase, which had the highest personal insolvency rates per 10,000 adults in 2009. They had all seen large increases compared with 2008.

Although these new figures show the picture in 2009, data already published shows that large numbers of people are facing debts in 2010. The number of people being declared insolvent in England and Wales has been at record highs for five consecutive quarters. There were 35,682 personal insolvencies in the first three months of 2010, a 17.9% increase compared with the same period a year earlier.

Debt charities are urging people to approach advice agencies for help as soon as they realise they are facing financial difficulties.

Insolvency comes in three forms in the UK. The first, bankruptcy, is the traditional way of escaping overwhelming debt. Bankruptcy lasts just one year but bankrupts are likely to lose all their assets including their house to pay something to the creditors.

The second form of insolvency is an Individual voluntary arrangement (IVA). This is a deal between the debtor and their creditors which is overseen by an insolvency practitioner. The IVA’s have less stigma attached to them, less chance of losing assets such as homes, but does involve paying some of the debts in one go or over a number of years.

The most recent tools for dealing with insolvency are the Debt Relief Orders introduced in April 2009. These allow consumers with debts of less than £15,000 and minimal assets or surplus income to write off debts without a full-blown bankruptcy.