Prime Minister Gordon Brown has said he will do “whatever it takes” to ensure that people’s savings are protected as the economy continues to battle through the financial crisis.
The possibility of savers losing money deposited into a bank never even crossed the minds of most people, and it was not until Northern Rock suffered financial problems and had to be nationalised that this possibility became more of a reality. The initial strategy started the Financial Services Compensation Scheme (FSCS) raising the level of potential compensation on savers deposits from £35,000 to £50,000. This limit is currently under review for a further increase.
After the Icelandic bank Icesave collapsed, many panicked as conditions with the way that their compensation scheme was set up meant that UK savers would not be covered for the first £16,000 of deposits. The UK government reacted by assuring all UK Icesave customers that their money would be refunded in full, regardless of any limits set by the FSCS.
So what measures have been put into place to ensure the safety of savers if a UK regulated bank or building society were to face similar problems?
The Financial Services Compensation Scheme (FSCS) was re-enforced last October to ease the crisis, and there has been a lot of debate over how to improve the system.
How has the system improved?
Before Northern Rock fell into trouble, the first £2,000 of savers money was fully protected, then 90% of the following £33,000 was protected. This meant that a £35,000 investment was only covered up to £31,700.
In October 2007, the system was re-structured, protecting savers for 100% of the first £35,000 per institution per person. This meant that as long as your money was spread out between different institutions, you could effectively protect large sums of money, and joint accounts would be seen as two people, therefore covering £70,000.
In October 2008 that threshold was again raised, from £35,000 to £50,000 per savings account
A fast track strategy has also been designed to provide those affected with access to some of their savings within 7 days of a bank closing.
It would currently take around a month before savers would be compensated if a large bank were to close.
How much of my savings are covered?
As it currently stands, any UK bank, building society or credit union will guarantee protection for deposits up to £50,000.
Banks from outside of Europe must set up a UK subsidiary in order to be allowed to operate in the UK and those subsidiaries must have a FSCS membership to provide protection on your savings.
Other systems are in place for banks based in the European Economic Area (EU members plus Iceland, Norway and Liechtenstein) that cover against their home scheme.
These schemes are set up to provide compensation for at least the first €20,000, although some offer substantially more than that which can amount to more than current UK protection limit.
Most of these schemes are also partly covered by the FSCS so any remaining money between the €20,000 (around £16,300) and up to £50,000 is also covered.
All individuals are currently covered up to £50,000, so joint accounts are seen as two seperate individuals, thus covering up to £100,000.
The protection limit only applies per institution, so if you have more than £50,000 savings it is recommended that you spread the money around to ensure you are fully covered.
For example, if you had £50,000 saved with Alliance & Leicester and an additional £50,000 with Abbey, the full £100,000 would be protected. However, if you had accounts held with different brands that fall under the same institution such as Halifax and Bank of Scotland, you would only be covered up to £50,000 of your £100,000. Some institutions also allow multiple claims over their brands, so make sure you have done some research before deciding where to keep your money.
For an up-to-date list of which banks fall under the same institution and which are counted as independent with individual registrations to the Financial Services Authority (FSA) see Which4U’s list of banks by institutions.
Something else to keep in mind is that if you have your money in high interest savings accounts, your £50,000 can quickly increase, taking it over the protection limit so your interest will not be covered. The best way to avoid any problems is to work out how much interest you expect to accumulate, and invest the limit minus the difference.
What protection is provided for small businesses?
The FSCS set up the deposit protection scheme for private individuals. However, small businesses can also benefit from similar protection to savers if the limited company meets at least two of the following three criteria:
- A turnover of no more than £6.5 million
- A balance sheet total of no more than £3.26 million
- No more than 50 employees
Partnerships can only claim up to £50,000, rather than £50,000 per partner.
Sole traders can only claim up to £50,000 in total, with both personal and business accounts included. This means that personal and business accounts must be spread over different institutions.
What about Irish banks?
The Irish government recently decided to offer full protection on all deposits, bonds and debts. This gives investers the freedom to keep all of their money in one place without having to worry about the possibility of losing any of it.
The banks currently offering this unlimited protection are Allied Irish, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society.
Gordon Brown has not followed Ireland’s move to offer an unlimited protection, but has stated that the government won’t let any UK depositors lose any money.