It is a common problem, ensuring your deposit account interest rate is keeping pace with the market. As individual clients, most of us will research the options, select an account and then trust the banks to continue to keep their end of the bargain or at least to tell their clients when they have changed their interest offering. But all too often, this is not the case. Banks regularly operate a business model based on the fact that their headline interest rates are temporarily and will be cut, as accounts are closed or downgraded. Keeping track of this ever changing environment is virtually impossible for all but the most diligent private clients, but on the other hand, optimising returns on cash deposits within trusts and companies is one of the main responsibilities of a fiduciary company, so it is reassuring to know trust companies have recognised this problem and developed solutions accordingly.
Vistra operates a cash management policy based on a pooled funds concept, which enables it to negotiate higher returns based on larger deposits from banks, whilst for reporting purposes, client funds are kept segregated. This approach ensures enhanced returns, clear identification of balances, regular monitoring of interest rates and a much improved risk diversification for clients.
Historically, trustees and company directors have sought to find the most attractive deposit returns in the market, moving client accounts between banks, when interest rates become uncompetitive. Changes in the account opening rules imposed upon banks to prevent money laundering and promote greater clarity in the operation of accounts mean that simply swapping banks to chase the best interest rate is no longer practical from a time and cost perspective. Equally, the recent banking crisis has highlighted the importance of deposit security: placing deposits with one bank alone is unlikely to represent a good risk diversification strategy.
Vistra therefore aggregates available cash deposits into a pool and the funds are then allocated amongst a number of pre-approved panel banks. The objective is to access higher yields by dealing in larger volumes, whilst at the same time allowing for greater risk diversification between banks used. Three pools are currently available: Sterling, a US Dollar and Euros.
Active management of the deposit pools ensures there is always sufficient liquidity to meet clients' requirements. Funds are invested in cash only products with enhanced returns and strong liquidity, often developed by the approved panel banks to specifically meet cash management objectives. In normal market conditions, this will provide the accessibility of a call account with the better returns of a deposit account. The pool does not hold any gilts or treasuries and therefore its overall risk profile is below that of a money market fund. For clients with specific cash management requirements, individual bespoke pools can be created, allowing clients to tailor their own liquidity and credit risk profiles.
Diversification of credit risk
Each pool will have target aggregate risk rating of A+ amongst the institutions used. Panel banks must have strong individual ratings of A- or more as rated by Standard and Poor's, with no bank allowed to hold more than 50% of the pool. Institutions with A- rating are permitted to hold up to 5% of the pool value, subject to the overall pool meeting its composite A+ rating target. Vistra is responsible for determining the risk and investment profile of the pool and the on-going monitoring and supervision of the performance of the funds invested.
All banks on the panel are reviewed at least quarterly. Banks that do not meet risk and return guidelines are removed from the panel and replaced with other qualifying banks.
Client assets continue to be completely segregated and identifiable. A full audit trail for all cash movements in client accounts is in place, with real time reporting available on individual client funds held with any panel bank.
An overall interest rate is achieved by blending the yields achieved across the banks used. A tiering matrix is then applied to ensure that clients with larger balances in the pool receive a larger proportion of the return than clients with lower balances.
At any point, Clients can elect to be excluded from the pool and request individual cash management services, should this be a more appropriate solution to their portfolio requirements.
Chris Burton, Managing Director of Vistra in Jersey comments, "We are constantly looking for ways to add value to the services we offer clients and deposit management is one such area. Banks have an unfortunate reputation for not always being consistent with their interest rate offerings, which for the individual can mean that today's best buy account is tomorrow's poor performer. We have addressed this problem with a system of active deposit management, but more importantly, we have also added a layer of risk control to our solution, as our experience tells us clients with larger balances in particular will want a balance of both safety and return on their deposit balances."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.