Even before this week’s nationalisation move, Northern Rock savers had the security of a full government guarantee of their deposits – whatever their balance. By contrast, most UK savers are only covered for 100 per cent of their first £35,000 if their bank or building society collapses.
The industry safety net, provided by the Financial Services Compensation Scheme, was strengthened in the wake of last year’s unprecedented run on Northern Rock. However, even this £35,000 cap has anomalies, say experts.
“People are moving money around to limit their balance to £35,000, but they also need to look beyond [this figure],” says Kevin Mountford, head of savings at Moneysupermarket.com, the comparison service.
The cap applies to a saver’s total balance with an institution – rather than per account.
But savers with accounts across a number of separate brands operated by the same corporate entity could also be restricted to just £35,000 of protection in total.
For example, savings with HBOS group brands – Halifax, Intelligent Finance, Birmingham Midshires and Bank of Scotland – are all lumped together for compensation purposes. This single limit also includes HBOS-administered accounts with the AA and Saga.
Experts say many savers won’t have grasped this restriction, which applies to some other banking groups too. “The average person isn’t going to know who owns what – and they wouldn’t think that the AA came out of HBOS,” says David Black, principal banking consultant at analysts Defaqto.
HBOS insists its protection is “clearly” spelt out in product literature. But Mountford advises savers to “look beyond the marketing brand” and “cut through to the [account’s licensed] deposit taker” to confirm if they are affected.
“In terms of spreading risk,” he says, “savers need to be spreading their cash across brands not under the same [corporate] umbrella.”
With some European banks, in the event of a collapse, savers might have
to claim from an overseas compensation authority initially, which could delay payouts.
Non-European banks are required to be authorised in the UK and so are fully covered under the FSCS’s normal £35,000 limit, according to the FSA. The Indian Icici Bank and Nigerian-owned FirstSave, both of which offer high rates in the UK, fall into this category.
European banks can run subsidiaries in the UK that are also fully covered by the FSCS. But under “passporting” rules, European Economic Area banks can choose to operate on a branch basis in the UK. In this case, if they went bust, savers would first need to turn to the bank’s home country compensation scheme. Such banks can also have “top-up” arrangements under the FSCS scheme so that savers are still covered to £35,000. This is how Landsbanki’s Icesave operates, while Kaupthing Edge, another high-paying Icelandic bank, is covered wholly under the FSCS.
Mountford says he is not aware of any banks operating in the UK with an overall safety net of below £35,000, but there is also no requirement to top up into the FSCS scheme. And with French and Italian compensation limits being much higher, in some cases savers could already be better protected.
By contrast, accounts in offshore jurisdictions fall out of the £35,000 FSCS safety net altogether. The Isle of Man has a deposit protection scheme covering 75 per cent of the first £20,000 of cash, but Jersey and Guernsey do not have compensation arrangements. However many UK banks have voluntary commitments covering their offshore subsidiaries.
