James Daley: Simplicity could end sleepless nights

If I had been given a tenner every time someone asked me whether their savings were safe over the past few weeks, I'd be well on my way to an early retirement. Friends, family, colleagues, readers – everyone wants to know the answer to the same question: which bank can I rely on?

Although the credit crunch is now more than a year old, what's struck me recently is that there's still a lot of confusion about exactly what would be and what wouldn't be covered by the Financial Services Compensation Scheme (FSCS), in the unlikely event that a bank should ever go bust.

And once you start to dig down into the finer details of the FSCS, it's not hard to understand why.

For this reason, I want to do my best to answer the questions that readers have put to me over the past week, and to help people to understand exactly how the FSCS works, and where its limitations are.

Almost every bank and building society that operates in the UK has a licence that is issued by the regulators, and with each licence comes automatic enrolment into the FSCS. If your bank is covered by the FSCS then that means – as of Tuesday – that if it were to go bust, all of the first £50,000 of your savings would be covered.

One complication, however, is that some banks own other banks – and whether the £50,000 guarantee covers each of these institutions, or just the group as a whole, depends on the organisation's structure. So, for example, HBOS owns Halifax, Bank of Scotland, Intelligent Finance and Birmingham Midshires but only has one licence for the lot of them. Hence, if you've got money with each of these banks, you'll still only get the first £50,000 back from the total of your savings across all four institutions.

When it comes to Royal Bank of Scotland and its subsidiary NatWest, however, both banks still have their separate licences. So customers with £50,000 in each would still get all of their money back were the group to go bust.

Abbey has taken over Bradford & Bingley's savings book, after the bank came dangerously close to collapse at the end of last week. However, it does not have B&B's licence. So people with Abbey and B&B accounts will only have one lot of protection. Conversely, Abbey has kept Alliance & Leicester's licence, so once its takeover of A&L is complete, customers with accounts at both banks will have full protection. Confused yet?

Ultimately, to find out how much protection you have, you need to find out who owns the banks where you keep your money, and call it to clarify how they are structured.

One other complication of the FSCS is that a small number of European banks do not have to be, and are not, directly regulated in the UK. As a result, deposits in these banks are covered by the protection scheme in the country in which they are based, not by the FSCS. So, for example, if you have your money in the Bank of Cyprus, you'll be covered by the Cypriot depositors' protection scheme which only protects 90 per cent of your savings up to a limit of €20,000 (£15,700).

So with all that in mind, where is your money safe? Alas, government-owned Northern Rock has now taken in so much money that it is starting to close its doors to new savers. That leaves National Savings & Investments, which is also Government-backed, but the rates are not nearly as competitive.

Abbey, which is owned by Banco Santander, and HSBC remain the two best-capitalised private banks. Nationwide, the UK's largest building society, is also in good health. Meanwhile, the Irish government has fully backed the deposits at each of the country's six largest banks, so you might want to take a look at the good rates offered by Anglo-Irish Bank.

As I wrote two weeks ago, however, it's not politically or financially feasible for the UK Government to let any of the big name banks go under. So while it's stopped short of saying that all major banks are guaranteed, such a guarantee has been implicit since it stepped in at Northern Rock. As long as you're with a well known organisation, you should be able to sleep well at night.

The Government and regulators are looking at a range of reforms for the FSCS. I hope they work on making it easier for everyone to understand. Confidence is never going to be restored in the financial system if consumers don't have absolute faith that their money is safe.