The Financial Services Compensation Scheme

May 16, 2012   //   by Keith McDonald   //   Banking and Savings Accounts, Latest Which4U Updates  //  3 Comments

Q. What happens to my savings if my bank goes bust

MPs have been expressing their dismay that so few people are aware of the compensation scheme for UK based savings, which they believe could help to restore public faith in savings accounts.

It’s little wonder, either. At the close of 2011, it was estimated that only 3% of people were aware of the guaranteed compensation measures in place for UK savings deposits, despite a multi-million pound television advertising campaign designed to spread the word. [See our January editorial.]

A recent poll has shown that MPs would prefer it if financial bodies were required to tell consumers about the Financial Services Compensation Scheme protection when selling relevant products and services.

To some degree, it’s in banks’ best interests to make sure that consumers feel at ease about the security of their savings – unless the bank is Passport protected or the customer has a large volume of savings at their disposal.

But as Secure Savings and Compensation is one of our favourite subjects – exemplified by an editorial, a savings guide, and a healthy proportion of the main saving account page – we are glad to oblige by spreading the word again.

A. The Financial Services Compensation Scheme

Mercifully, most people will find that the majority of their UK-based deposits are safe. The Financial Services Compensation Scheme covers deposits to a maximum of £85,000 per person per institution in the event that a bank fails.

The £85,000 per person is clear enough; it’s just this institution label that’s surprisingly difficult to grasp. And it’s especially important for those with high-value deposits to understand what constitutes an ‘institution’, so that they can ensure that all of their cash is safe.

An institution is best defined by its FSCS registration. Many banks and building societies hold individual registrations, which is perfectly straightforward: you’re covered for up to £85,000 for deposits in each one.

But where banks and building societies share a registration, the £85,000 per person maximum limit covers deposits across all of them collectively rather than each one individually.

At Which4U’s main savings account page, under ‘Grouped Banks’, we’ve identified by row and by colour those banks that share a registration. (And we’ve put efforts into upgrading our ghastly old HexColour effort into something that looks a little more attractive too).

So, what does this mean in practice? The example we’ve given in our upcoming audio guide accompanies the above image:

If you have £50,000 invested in Nationwide and £50,000 in Halifax, you should be perfectly safe, as these are separate institutions.

If you have £50,000 in the Nationwide and £50,000 in the Cheshire Building Society, £15,000 of this is theoretically at risk, since they both share an FSCS registration and the guaranteed compensation limit covers both collectively.

The bottom line is: provided that the bank has an FSCS registration (which almost all have), savings and deposits up to £85K are safe from a banking collapse.

For those with higher volumes of savings, it’s advised that no more than c. £82,000 is deposited in any one FSCS registered institution (below the limit so that interest can be factored into any compensation claim.)

If a million pounds was split between a dozen registered ‘institutions’, it should all be perfectly safe.

Overseas Banks

And what of overseas banks? Though most are covered by the FSCS in exactly the same way, some banks from the European Economic Area (e.g. Bank of Cyprus and ING Direct) use “passport” compensation schemes with a   compensation limit of €100,000 through their home governments.

In theory, this should be just as secure. However, there is no cast-iron guarantee that foreign compensation schemes will pay out – in the event of a banking collapse, that government might want to prioritise its own people first. There’s no immediate sign of a collapse, it should be noted, but it’s just worth keeping this in mind before committing a large volume of savings to a “passport” protected bank.

To see which overseas banks are protected by the FSCS and which are protected by Passport schemes, see the saving with foreign banks table on our savings accounts page.

For more on the FSCS, Secure Savings and Compensation:

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