The ups and downs of sterling have shown the importance of being savvy when it comes to changing money.
It’s been a tough few years for anyone living abroad but earning money in sterling. Following the UK’s vote to leave the EU, the pound fell precipitously. While it has regained a certain amount of equilibrium in the wake of last year’s general election, it is still trading well below the levels last seen before June 2016.
As a result, if your income is in pounds but your outgoings are in euros or dollars, you’ve lost out. Conversely, if you’re in the happy situation of living in the UK but being paid in another currency, you’ve enjoyed a significant pay rise.
The dramatic ups and downs suffered by the pound have made it clear just how much money can be made or lost on the back of currency swings. The problem is that in the absence of a functioning crystal ball, exploiting these moves is almost impossible. Currency markets are swayed by many factors, from economic data to political mutterings to mergers and acquisitions (big cross-border deals can involve a lot of currency moving around), and trying to second-guess their swings back and forth is little more than gambling.
Avoid rip-offs
What you can do is make sure you get the best deal available when you need to change money. And it’s important to do so. Costs across the financial industry generally are coming down, but foreign exchange is one area where there is still plenty of scope for being ripped off. Bureaux de change at the airport can charge double-digit mark-ups on even the most commonly bought currencies.
If you need to exchange money on a regular basis (perhaps you live abroad but draw an income from the UK), or for a one-off transaction such as buying a property, this matters even more. Getting the best rate can make a huge difference to your standard of living – or to the cost of your holiday home.
In most cases you’ll find that you’ll get the best deals by using a specialist foreign exchange broker, although it’s also worth getting a quote from your bank for comparison purposes. Popular brokers include Caxton FX, OFX and Moneycorp, but there are many others. When shopping around, there are a few points to consider.
First, how competitive are they on costs? Look at both the exchange rate you’re getting and any fees added. The important figure is the all-in cost – ultimately, how much are you paying for a given amount of foreign currency? Typically, the larger the sum, the better the rate – and for particularly large transfers, it may be worth calling and discussing in person.
Second, what’s the service like? Can you speak to a broker easily if you need to? How quickly can transfers take place? Do they trade in the specific currency you need? (All but the most exotic currencies should be simple enough, but it’s worth checking in case.) Depending on how complicated your currency needs are, you may prefer to pay a little more on the exchange rate to get a better service.
Do make sure that the broker is authorised (not simply registered) by the financial industry regulator, the Financial Conduct Authority (FCA). You can check the FCA register at fca.org.uk/firms/financial-services-register. If a firm is FCA-registered, it means it must hold its clients’ money separately from its own, which means the funds should still be there if the broker goes bust.
Consider also what to do about exchange rate risk. Most brokers will allow you to lock in a specific exchange rate for a period of anything up to 12 months. So, for example, if you know that you’ll need to have money ready to send as a deposit on a house in three months’ time, but you think the exchange rate is particularly favourable just now, you might want to lock the rate in. Bear in mind that you don’t have to take an either/or approach – you could lock in half of the money now, and leave the rest to move where the market takes it.
When considering whether to “lock in” a rate, be aware of how the worst-case scenario might affect you. It’s easy to be tempted into trying to play the currency markets – particularly if you are changing a one-off lump sum – but that way lies misery. Considering what would happen if the market moves against you, rather than in your direction, will keep you grounded.
John Stepek is executive editor of Moneyweek magazine
