Choosing the wrong option for currency exchange can be costly. We explain rules around protection and highlight how to avoid hidden fees and get the best deal
Latest: The drop in the pound’s value against the euro is likely to sound as a clarion call to those hoping to move money back from the UK, possibly, from a house sale. Moving back €100,000 will provide around £76,500 before conversion fees, marked improvement from £70,000 last summer.
Sterling fell yesterday to €1.275, the lowest level in more than a year and down nearly 11pc from a high of €1.437 in July. It recovered marginally today to €1.288.
What next?: The euro could come under pressure in 2016 amid growing concerns for economies in the eurozone – which could trigger even more money-printing by the European Central Bank.
In theory, the euro could fall from here, with Britain arguably in a stronger position. However, uncertainty surrounding Britain’s vote on membership of the EU will likely weigh on the pound.
Guide to moving money abroad
Demand for currency transfer services has exploded in the past few decades as Britons have an increasing number of reasons to exchange large sums of pounds into, mostly, dollars or euros.
This is because more people are buying and selling property abroad and need to move the deposit, or the proceeds. There’s also a need for regular sums to be transferred, which could be from a pension or savings moved to help pay bills or an overseas mortgage.
Because of increasing migration, be it from the UK to Australia or Florida or Poland to Britain, there’s also increased demand for smaller payments be made to families.
Here’s the catch. Transferring money between banks accounts in one country is easy, with payments made using a wide array of platforms – over the phone, from a desktop computer or on a smartphone. However, it is not quite as simple when it comes to transferring money overseas.
Your bank will move money, but at substantial cost. The banks still dominate – handling 80pc of transfers. They charge up to £40 for a transfer and also make more money by adding a margin on the exchange rate, which can be as much as £5,000 on a £100,000 transfer.
The alternative is an array of specialist brokers, which makes up the other 20pc of the market, Currencies Direct, Moneycorp, the Post Office, Hifx and the newer, no-frills operations such as Transferwise.
There are several factors involved that are worth thinking about before making the transfer. Fees and exchange rates need to be considered which are significantly different depending on what provider you choose to make your payment.
Other things to consider are how much you need to transfer, how quickly you need the money to arrive and whether it is a one off payment or needs to be carried out regularly – all of these carry different costs and will affect how you decide to pay.
What do I need to make the transfer?
To make an overseas payment, you will need:
- Your bank details
- Recipient’s details – name, address, name and address of bank, country they hold the account in. You will also need their International Bank Account Number (IBAN) and Bank Identifier Code (BIC)
What fees are involved with the banks?
Typically, providers can charge a fee which is made clear. The fees differ depending on what country the payment is being made to (it can be more expensive outside Europe), how much money is being sent and how fast it needs to be received.
|Bank||Fee for European transfers||Fee for rest of world transfers|
|HSBC||£0 (if both sender and recipient have HSBC account), £4 if not*||£0 (if both sender and recipient have HSBC account), £4 if not*|
|RBS||£10||£22 (£30 for express payments)|
High street bank overseas payments charges
* Online payments
There’s also differences if you make payments online or in branch. For example, Lloyds charges £10 for payments of less than £5,000 and £17.50 on amounts above this if the transaction is made online. However, transfers made in branch or on the phone cost more – a £20 fee for payments below £5,000 and £35 on higher transfers.
In the same way, HSBC customers who make payments into an oversea HSBC account in branch must pay a £20 fee. To any other bank it costs £9 to countries in the EEA (European Economic Area – the EU plus a few other countries) and £30 to those outside.
A less visible “fee” will also apply which is connected to the exchange rate. Not every service offers the same exchange rate, which changes by the second. This marked-up rate often goes unpublished which means it is often referred to as a “hidden fee”.
Your bank should tell you the exchange rate when it is asked, but unless customers ring up every provider for a quote, it is difficult to compare which one is offering the best rate.
Andrew Hagger of MoneyComms says customers tend to look to their bank first as they assume all charge similar amounts. However, this is not the case and Hagger suggests the system is akin to that of an overdraft in that “the tariffs are all different and the customer is bamboozled with rate and fee combinations and doesn’t know which service to choose”.
Hagger added: “I think the key message is to use a specialist foreign currency specialist and avoid the high street banks – it’s just one of many services that banks offer but it’s not their bread and butter and hence their prices are not competitive.”
There may also be a charge to receive the payment – the beneficiary will pay this unless you choose the “sender to pay all costs” option.
How safe is currency exchange?
Deposits held in a bank or building society are protected under European law. They are bound to insure funds up to €100,000.
With other money transfer services, the rules are slightly different. They are not committed to hold deposits in the same way as banks – they are just transferring money which means they are not covered by EU regulation.
The companies may be “authorised” or “registered” by the Financial Conduct Authority (FCA), which are very different things.
An FCA “authorised” service means your funds cannot be “co-mingled” – they must be kept separate from the company’s money for two working days. At the end of this time, the cash must be safeguarded and held in a different bank account. This means that if the company goes bust, your money would be easy to untangle and you should get it back.
Companies that are FCA “registered” do not offer any protection.
You can check which companies are regulated on the FCA register.
The list of major currency exchange services that ARE authorised includes: Moneycorp, Western Union, Transferwise, HiFX, Caxton FX, Halo, Currencies Direct and Moneygram.
Who provides an overseas money exchange transfer service
Whether you are wanting to transfer money abroad to a friend, or buy an overseas property, there are several companies who offer the service and it is worth speaking to a few before committing to the payment.
- Your bank – safe but uncompetitive rates
While it might be easiest option to use your bank to make the overseas payment, it may not be the best. The Money Advice Service suggests it is good for small, regular payments, however there are fees involved which could stack up.
One way to cut costs is to find out if your bank has an overseas branch, like HSBC.
- Specialist brokers – best for transfers over £5,000 but shop around
For those planning on transferring large amounts – moving savings abroad or buying a property – it is worth tracking down the best exchange rate from a specialist broker. Exchange rates change daily, but with FX companies they are easy to compare. It is worth shopping around as even the smallest mark-up could make a large difference. Some of these firms, arguably, offer a more personal service. Customers sometimes get a personal account manager, for instance.
With large sums at stake, be sure you are dealing with an FCA authorised company. A firm that is simply registered will offer no protection. For those who are nervous, find out what your bank is offering and compare. However, Jason Porter, director of expat wealth planner Blevin Franks, says you’re unlikely to get a good rate as banks do not generate sufficient profit from large, one off payments.
- Online money transfer services – attractive rates but no face to face service
Low-cost, online services are less well known but can charge more competitive prices thanks to lower overheads. This is where you’re more likely to find companies that are only registered and not authorised.
|Service||Euros received from £1,000 transfer||Fee|
Online money transfer service rates and fees as on November 10 2015
Firms are likely to have transfer limits. For example, Transferwise allows transactions up to £1m whereas FairFx has a limit of £250,000. Regardless of the amount, make sure you establish if the service has the funds you need to transfer before going ahead.
Exchange rate contracts, orders and plans
A forward exchange contract (FEC) or simply, a “forward’ is designed to protect customers against fluctuating exchange rates. This could prove useful when making future payments, such as purchasing a new-build which could require stage payments for 12-18 months while the property is being finished.
The price paid for the currency is agreed on the day and then remains valid for up to two years.
To illustrate why customers might be wise to consider a forward exchange contract, the Financial Ombudsman had this to say: “We recently saw a case where a consumer had sent money in sterling for a house purchase in Australia.
“They didn’t opt to convert the money in advance and were subsequently horrified to find themselves £20,000 short when the money was converted. We didn’t uphold the complaint as the bank hadn’t made an error and had highlighted the options.”
Photo: (c) Vasiliki Varvaki
Blevin Franks’ Mr Porter also recommends looking at other options, depending on what you need to make the transfer for.
- Spot contract. This allows you to buy or sell currency ‘on-the-spot’ to be paid immediately or on the ‘spot date’, which is usually two business days later. It’s ideal for people who need to transfer money quickly, and enable you to buy foreign currency immediately.
- Stop loss order. This type of order allows you to protect your losses if the exchange rate works against you. Customers can set a limit of the minimum and maximum rate they require to make the transaction, which is useful for those who want to make a large transfer but with no time constraints.
- Regular payment plan. This plan is suitable for those making regular transfers, like paying an overseas mortgage or moving UK pension payments abroad. The exchange rate can be fixed for two years and is usually offered at a competitive rate. However, once you’ve agreed to the plan, you are locked in. Mr Porter suggests considering anything that might affect your monthly transactions, like mortgage payments.
Marianne Gilmore, director of Moneycorp, said: “There are more flexible alternatives available to expats who expect to see more advantageous rates in the near future, such as a ‘market watch’, ‘limit order’ or a ‘stop loss’, which allow you to exchange once rates reach a previously agreed level.
“However, it is worth noting that a market watch is not a firm order to buy or sell a currency. If the rate you have asked to be watched is reached outside trading hours, you may in fact miss the target rate you are looking out for, unless it is still available once normal next working day office hours resume.
“Limit orders and stop losses are firm orders and can form part of a strategy to target a best-case scenario rate of exchange (limit order), or worst case (stop loss) where you cannot afford for the rate to move any further away from a certain exchange rate.
“Both are excellent tools and are worthy of serious consideration; a) to potentially achieve an advantageous target rate that is not currently available; and b) to limit downside risk if the rates move adversely against a client. “
Currency exchange: What to watch out for
As well as making sure your money is protected if things go wrong, or at least weighing up the risk, there are some other things to watch out for when making overseas payments.
The Financial Ombudsman deals with complaints all the time and says it has recently seen a number of enquiries where customers have been directed to a fraudster bank account when trying to rent a holiday home through an official website.
As well as these kind of scams, the ombudsman has also dealt with issues involving expectations of exchange rates, and mistakes being made when entering the recipients details.
The ombudsman suggests customers take care when making payments and offers these tips.
- Exchange rates change by the second – make sure you know the exchange rate and how much money will be received the other end to avoid unpleasant surprises;
- Be absolutely certain you have the correct details of the recipient;
- International banks can take longer to credit customers – if timing is important, make sure you know when the funds will arrive in the overseas account;
- Complaints are rarely made about withdrawing pensions abroad, but the ombudsman suggests fixing the exchange rate for a fixed period to avoid getting stung during the transfer.