As the euro crisis ripples spread, are your savings completely safe?
There is a financial compensation scheme in place, but not everything is covered
Sunday 20 November 2011
It's meant to be the ultimate backstop to stop you from losing your life savings.
The Financial Services Compensation Scheme (FSCS) is there to protect UK savers in the event that a bank or other institution goes bust. But many Britons might be unaware that their savings and investments are not fully protected.
The FSCS protects UK-regulated deposits up to £85,000 per person per institution or £170,000 for a joint account. The scheme is an independent fund set up by UK financial bodies and regulated by the Financial Services Authority. It gets called on more often than you'd probably think.
However, during the past few years, foreign banks from countries such as Cyprus, India, Pakistan and the Netherlands have offered table-topping savings rates which have lured in savers. But it's not the far-flung banks you should be worried about; it's the ones in Europe.
"Banks from the European Economic Area (but not outside Europe) can opt for a different type of protection, known as the Passport scheme," explains Andrew Hagger of financial information site Moneynet. "In essence, it means if they went bust, you'd have to claim money back from the bank's own country's version of the UK FSCS.
"Thus you are relying on the financial capability of the foreign government. Since December 2010, all European countries must have a compensation limit of €100,000 (hence the £85,000 in the UK). At least there is an element of uniformity here now, whereas in the past the amount protected differed depending on the home country of the bank."
The Passport scheme is an option only for banks from countries within the EEA. Banks from outside Europe have to be fully regulated in the UK to trade. But with the eurozone crisis seemingly getting worse by the day, which country runs into difficulties next is anyone's guess. While there's nothing to say that a Dutch or Cypriot bank would go bust or that the relevant compensation scheme wouldn't pay out if they did, memories of the Icelandic banking crisis will be haunting savers.
Icelandic bank Landsbanki tempted about 300,000 UK savers with its popular Icesave account. When Landsbanki went bust along with several other of the country's banks in October 2008, the Icelandic compensation scheme should have refunded UK savers the first £16,000 of their savings with the UK FSCS making up the rest. But the Icelandic economy was in such a poor state that the Icelandic government didn't have enough cash to refund UK savers, and the UK government had to step in and refund money to Britons.
Savers should also double-check they don't have more than £85,000 with a single institution as the personal limit is per banking licence. A series of takeovers and mergers means in some cases several brands are covered under one banking licence. For example, savings with the AA, Birmingham Midshires and Saga all come under Lloyds Banking Group's licence, while Alliance & Leicester and Cahoot are part of Santander.
There are certain other products which are not protected by the FSCS. Some investment products also fall under the scheme and investors can claim up to £50,000 if an authorised institution defaults – but only if their money was mismanaged or they were mis-sold products.
However, a recent undercover investigation by consumer group Which? found that some banks and building societies are not making the limit clear to investors seeking advice. Almost half of the bank and building society advisers approached by Which? failed to mention the FSCS, and others made rudimentary mistakes about how much protection consumers receive.
Some structured products where money is held in a cash account are protected up to £85,000, but others classed as investments are covered only up to £50,000 and only in the event of mis-selling or mismanagement. One Santander adviser incorrectly told researchers that its investments were covered up to £85,000 instead of £50,000.
Some new and alternative types of savings account are not covered by the FSCS. "As an example, peer-to-peer offerings from the likes of Zopa and Funding Circle have strong headline rates on offer but deposits are not covered by FSCS," says Kevin Mountford, head of savings at Moneysupermarket.com.
"That said, they would claim that the risk is minimal and for some the attraction of better rates will be worth it. We've also seen corporate bonds issued by some leading brands with the return based on the companies' performance, but again these are not covered by the Government's protection scheme."
Holidaymakers should be aware that money held on prepaid cards is not covered by the FSCS. "If the provider goes bust, then cardholders will lose all of the money on their card and will not be eligible for protection," said Mark Neale, chief executive of the FSCS.
Other types of account that aren't covered by the FSCS include PayPal, Christmas hampers and cashback website accounts. To be on the safe side don't leave the cash there for too long, and move it somewhere safer instead.
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