Take care, FSCS changes mean your savings aren’t as protected as they were
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Version 0 of 1. If you are fortunate enough to have quite a lot of cash stashed away in savings, your number one new year’s resolution should be to check whether you are affected by a change to the protection that kicks in if a bank goes bust. New rules took effect yesterday, and the bottom line is that if you have more than £75,000 tied up with one financial institution, you should probably move the surplus to another bank or building society. However, as is so often the case with money and finance, it’s not quite as simple as that. The change amounts to a watering down of the protection offered by the Financial Services Compensation Scheme (FSCS), the official safety net for customers of financial firms that go out of business, which has paid out in excess of £26bn to more than 4.5 million consumers since it was set up in 2001. For several years, the deposit protection limit covering money in savings and bank accounts, cash Isas, savings bonds etc stood at £85,000. This figure was “per person, per firm”, and for joint accounts was £170,000. However, as of 1 January this has been cut to £75,000 (£150,000 for joint accounts) because of a European directive. Britain has been forced to make this change to bring it into line with the rest of the EU, which has a threshold of €100,000 (£73,000). The UK is in effect being penalised for the fact that the pound has risen against the euro. Some commentators have previously described the change as “bonkers”, though it is fair to say the vast majority of savers won’t be impacted because they don’t have anything like £75,000 put away. However, those who do “have a lot to lose” if their financial institution were to go under, warns Hannah Maundrell, editor in chief of the money.co.uk website. The obvious way for savers to raise their protection is to split their money between different banks and building societies. However, while this should be quite simple, says Maundrell, it is made complicated by the fact that FSCS cover is shared between banks that operate under the same licence. For example, HSBC and First Direct fall under the same umbrella, so share combined protection. In some cases a whole group of seemingly separate savings brands share the same licence, where one £75,000 protection limit now applies. For example, you could have £75,000 in a Saga savings account, £75,000 in an AA savings account, £75,000 in Birmingham Midshires and £75,000 in the Halifax, but in effect only one of them will be FSCS protected as they are all part of Bank of Scotland for compensation purposes. Another group of brands sharing a licence is Yorkshire building society, Egg, and the Norwich & Peterborough and Barnsley and Chelsea building societies. It’s the same story with Nationwide and the Cheshire, Derbyshire and Dunfermline building societies. Last month peer-to-peer lender RateSetter published research claiming that public awareness of the level of FSCS protection is declining, and many people overestimate its ability to protect them. It quoted a retired investor from Yorkshire, Sean Hodgson, as saying: “The reduced FSCS cover is a definite consideration in how I allocate my investments. I certainly don’t want the risk of losing a large percentage of my investment, so I’ll be careful not to exceed the new limit in any single provider.” While most banks offering products to UK savers have a UK banking licence and the £75,000 FSCS protection, European banks are also allowed to operate here under their home country’s regulations under a system known as passporting. The main difference affecting consumers is that these passporting banks are covered by their home country’s compensation scheme (up to €100,000 per person) and not the UK’s, says data provider Moneyfacts.co.uk. These banks include AgriBank (regulated in Malta); Fidor Bank (Germany); Handelsbanken and Ikano Bank (both Sweden); RCI Bank UK (France); and Triodos Bank (Netherlands). Rachel Thrussell at Moneyfacts says: “Savers can be reassured that under European law, savings with European banks are covered by the compensation scheme of the bank’s home country, though they should bear in mind that in the event of a crisis they face language and exchange rate issues.” |