Jeff Salway: Hole in bank safety net just got bigger

Savers may be feeling a little less secure after the changes to the savings compensation scheme. Picture: Kobal Collection

Savers may be feeling a little less secure after the changes to the savings compensation scheme. Picture: Kobal Collection

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RULE change means £10,000 cut in protection for savers, writes Jeff Salway

Savers remain in the dark about changes to savings compensation limits that reduce their protection in the event of a bank or building society going bust.

The safety net for savings deposits was lowered by £10,000 yesterday to bring the UK into line with European Union legislation. But research shows that few people are aware of the changes, adding to concerns over flaws in the scheme that could undermine confidence in the UK banking system.

The fall in the compensation limit from £85,000 to £75,000 leaves anyone with more than that in their account at risk of being unprotected if their provider fails. With the new limit fixed for at least five years, its value will also be eroded by inflation over that time.

The cover is provided by the Financial Services Compensation Scheme (FSCS), which pays out to people who have suffered losses when their bank, building society, insurer or financial adviser has gone out of business.

The lifeboat scheme has paid out more than £26 billion to 4.5 million people since it was set up in 2001, including those who had to make a claim when Northern Rock collapsed in 2007.

More than 95 per cent of people are still protected by the new limit, and depositors are covered by a temporary limit of up to £1 million for balances left in an account for a short period (such as during a house purchase or after receiving a windfall).

But 74 per cent of people ­surveyed by RateSetter, the peer-to-peer lender, are unaware that the savings safety net is changing.

It uncovered several misconceptions around the FSCS, including a belief that it protects savings against the effects of inflation.

Confusion also lingers over the way the FSCS covers different savings brands.

This arises from a licence system based on institution and not brand, which means many savers with deposits in different brands under the same parent company may have far less protection than they believe.

Andrew Hagger, personal finance expert at Money­comms.co.uk, said: “For example Halifax, BM Savings and Bank of Scotland all share the same registration, so if you had £75,000 in each, totalling £225,000, only £75,000 would be protected.”

It’s not always clear-cut, however. Ulster Bank, NatWest and Royal Bank of Scotland are all part of the RBS group but they all have their own individual registration, which means deposits of £75,000 in each are fully protected.

“It’s not surprising that people don’t understand, and worryingly some people will think they have done the right thing by splitting their savings balances but unknowingly could still be at risk,” said Hagger.

“The rules have been causing issues for many years and is something that should be simplified now rather than as part of a rethink if and when a bank goes to the wall at some time in the future.”

There are differences too in the treatment of savings held in European bank accounts. European banks that operate in the UK (through a passporting system) are covered by their domestic compensation scheme and, while the €100,000 limit still applies, the sterling value may fluctuate.

The European banks operating savings accounts in the UK include Handelsbanken (of Sweden), RCI Bank (France) and Triodos (Netherlands).

Rachel Thrussell, savings insight manager at Moneyfacts.co.uk, said: “With an increasing number of European banks now offering competitive rates, customers need to be aware that not all savings accounts offered in the UK are covered by the UK compensation scheme.

“However, savers can be reassured that, under European law, savings with European banks are covered by the compensation scheme of the banks’ home country, although they should bear in mind that in the event of a crisis, they could be faced with language and exchange rate issues.”

Low awareness of the FSCS also extends to the protection provided to people who lose out as a result of poor advice. Research by the scheme found that just 45 per cent of consumers know they can seek compensation through the FSCS if they have lost money as a result of advice given by a regulated firm that subsequently went under.

The awareness gap means many people will be unaware that they aren’t protected by the FSCS – or the Financial Ombudsman Service – when they buy products without taking regulated advice. This includes many fund supermarkets and investment brokers that may appear to offer advice but which only provide information or guidance.

• To see how your provider is protected by the FSCS, visit {http://www.bankofengland.co.uk/pra/Documents/authorisations/fscslists/fscsbankingsaving1509.pdf |www.bankofengland.co.uk/pra/Documents/authorisations/fscslists/fscsbankingsaving1509.pdf|Link to site}

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