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It has been a terrible summer for those of us with a savings habit. The Bank of England’s rate cut has triggered a slide in interest rates across hundreds of savings accounts — and I’m afraid this isn’t the only Brexit-related bad news.
In times of heightened volatility, it is comforting for savers to know that up to £75,000 of their cash will be protected if a bank or building society goes bust under the UK’s Financial Services Compensation Scheme.
What you might not know is that the amount of compensation consumers receive is set by the European Commission.
The current limit of £75,000 per person per firm began in January, but was set on July 3 last year. At that time the €100,000 ceiling set by EU law was worth a little more than £71,000 which the UK government rounded up to £75,000. Before that, it was £85,000 — the sterling equivalent of €100,000 in 2010 when the EU originally set the level.
And of course, we all know what has happened to sterling since the Brexit vote. Since January, when the £75,000 limit began, the pound has tumbled 15 per cent against the euro, with much of the fall occurring after June 23. So €100,000 is currently worth more than £86,000.
However, the Treasury has told FT Money that it will not be asking the European Commission to raise the £75,000 threshold that is protected if a bank or building society goes bust.
Normally the limit in sterling would be fixed for five years regardless of currency fluctuations. But I have discovered that the EU directive has a provision that allows the limit to be changed at any time in “unforeseen” circumstances (and I would argue that the Brexit vote and resulting currency fluctuation fit this description).
Raising the level of protection would give some help to the estimated 1m UK savers with more than £75,000 in savings accounts. And goodness knows they need it.
Santander, Nationwide, and Coventry Building Society are just three of the most recent to slash interest rates paid to savers after the Bank of England halved the bank rate to 0.25 per cent a fortnight ago. Since then, consumer website savingschampion.co.uk has recorded rate cuts on more than 500 other accounts. They follow nearly 1,000 cuts since the beginning of the year.
It is not just the cut to the bank rate that is causing these falls. The Monetary Policy Committee has been buying up bonds in a £60bn extension of its quantitative easing programme that leads commentators to foresee interest rates remaining “lower for longer”.
Worse, it is preparing to launch the Term Funding Scheme, which will earmark £100bn to cheaply lend to banks at around 0.25 per cent. This will be even worse for savers than its predecessor the Funding for Lending Scheme, which has lent banks £60bn at 0.75 per cent. When it began in summer 2012 it caused a precipitous drop in savings rates and they have drifted down further ever since. A larger quantity of even cheaper money will mean rates paid to savers will continue to fall.
Faced with such a collapse in the interest earned, a rise in the limit protected in any one account would have two advantages for big savers. First, they would have to split their money into fewer accounts. Secondly, more of it could be earning higher rates of interest.
“Anything that can be done to boost the morale of savers would be welcome, although I won’t hold my breath that the current level will be increased, even in these extraordinary circumstances,” said Anna Bowes, director of savingschampion.co.uk. “An increase back to where we were [£85,000] would mean that savers who want to protect their cash can potentially open fewer accounts and therefore squeeze out as much interest from the best paying accounts that they can.”
The cash difference it would make is small. Someone with £375,000 cash savings — a typical customer of the website’s concierge service — would make only an extra £30 a year by dividing it into parcels of £85,000 rather than £75,000 if the money was saved in the top five one-year deposit accounts. On five-year deposit accounts the difference would be £50 a year. But it would give a psychological boost to savers at a time when they seem to be under relentless attack.
The exact wording of the directive means the government must take action if it accepts the fall in sterling was unexpected: “Member states shall make an earlier adjustment of coverage levels, after consulting the commission, following the occurrence of unforeseen events such as currency fluctuations” (directive 2014/49/EU Article 6, paragraph 5).
Ben Lasserson, a partner who specialises in EU law at Pinsent Masons, said that the word “shall” in statutory drafting “denotes an obligation”.
Before that word applies, however, the government has to accept that there have been “unforeseen events”. And Mr Lasserson warned that under EU law “exceptions to general rules tend to be interpreted narrowly” and that would “tend to suggest that the bar for what constitutes ‘unforeseen’ circumstances would be set high”. He also warns the compulsory consultation with the commission makes “any attempt to rely on the provision [to change the limit] uncertain.”
The Treasury would not say if it was considering putting the matter to the commission. A Treasury spokesman told FT Money: “The government will abide by EU regulation until we leave. So we are where we are.”
When asked specifically if the Treasury was consulting the commission about such a change, the spokesman would only say: “The coverage level for deposits protected under the UK’s Financial Services Compensation Scheme is set at £75,000 per person per authorised firm, which covers 95 per cent of UK depositors in full.”
He was a little more forthcoming on the question of whether the limit might fall back to the £50,000 set by the UK government before 2010, when the EU forced a rise to €100,000. “The government has made clear that it will take all appropriate steps to protect consumers from the impact of the UK leaving the EU.”
None of this affects my own preference for cash in later life. There comes an age when it is not the return on money that matters, but the return of the money. Within its limits the deposit protection scheme gives that absolute guarantee. And as I reported here some weeks ago, active cash — moving it around to get the best rates once a year — has outperformed a bog standard FTSE tracker in more years than not. King cash has not been dethroned yet.
Paul Lewis presents Money Box on BBC Radio 4, returning 12 noon on Saturday September 3, and has been a freelance financial journalist since 1987; Twitter:@paullewismoney