How safe is your cash from Irish meltdown?

CONSUMERS with savings, credit cards, mortgages and insurance held by Irish institutions will have watched anxiously as last week's crisis unfolded, and wondered how safe is my money?

A multi-billion-pound bailout of Ireland's biggest banks could soon be under way, although the strings attached may not be clear for some time. Now is a good time to review any financial relationship with the Emerald Isle.

Three banks have large numbers of UK customers: Bank of Ireland, Allied Irish and Anglo Irish.

The greatest exposure is to Bank of Ireland, through its joint venture with the Post Office. If you have taken out a savings account, credit card, mortgage or insurance through the Post Office then you have a technical exposure to the Irish crisis.

Bank of Ireland has also long been active in the UK mortgage market, not least through its subsidiary Bristol & West.

Many investors will also be exposed to Anglo Irish through a fixed rate saving account. Anglo was very aggressive on the fixed rate bond front recently, topping best buy tables and attracting a lot of money. These effectively locked cash away and penalised investors for withdrawing, so many may still have money there.

Allied Irish Bank is predominantly a business bank in the UK, although it has some personal customers, who are also normally business clients.

Finally, there will be investors in Dublin funds, from Celtic Tiger funds to exchange traded funds and offshore bonds. Dublin was a popular location with fund managers because a more pliable regulatory system made it easier and faster for companies to set up funds. Lower rates of tax also made business more profitable than running the funds out of Edinburgh, Glasgow or London.

Scotland on Sunday looks at the risks ahead and the options available to consumers.

Savings

The position with savings is complex. The good news is that those who opened savings accounts with the Post Office, perhaps not realising it would be held in Ireland by the Bank of Ireland, can breathe relatively easily. At the start of the month, Bank of Ireland opened a UK subsidiary and transferred all the cash over. This means investors are protected by the UK's Financial Services Compensation Scheme (FSCS). Should the bank go down, deposits worth up to 50,000 are protected, regardless of how many accounts an investor holds, or whether they are in a single or joint account. Two investors in a joint account could qualify for a maximum 100,000 redress.

To sleep safely at night, investors might be advised to limit their nest egg with the institution to 50,000 as they would with any other UK savings institution.

Anglo Irish savers have the particular problem that those who are still with the institution may be locked in and face penalties if they withdraw. However, as the future looks uncertain, they need to carefully weigh the risk of leaving large sums in Dublin. Certainly, anyone who has their life savings in the Irish capital should consider repatriating a significant proportion of it for peace of mind.

In theory, your cash is safer in Ireland than in mainland Britain, because while its deposit protection scheme covers 100,000, the government has effectively guaranteed all until the scheme is reviewed next June. The concern must be that terms imposed on the government by any rescue might have an impact on these guarantees. That said, 100,000 is the standard for Europe. Indeed, from next year the UK is supposed to be moving on to this regime. The FSA is consulting on moving to an 85,000 compensation level for the UK.

Finally, if the banks are subject to draconian penalties for the bailout, they are unlikely to be able to offer products on the attractive terms they have in the past.

Mortgages

Homebuyers could have their mortgages in Ireland, through either the Post Office connection, or via Bank of Ireland, its subsidiary Bristol & West, or Capital Home Loans, which is part of the Irish Permanent, Irish Life group.

Borrowers like to reassure themselves that they have nothing to worry about if their institution faces difficulties, but homebuyers can face huge headaches if their lender goes down. Firstly, as a creditor, they will be pursued for the interest and capital they own. Furthermore, lenders which are no longer trading profitably will be in no position to offer attractive terms. Interest and other charges and penalties could soon become unpalatable.

The other worry where lenders are short of cash is that they will show borrowers less understanding if they run into troubles. They may be quicker to repossess than healthy institutions able to take a longer-term view.

Insurance

Although the Post Office has been selling insurance via the joint venture with Bank of Ireland, customers have been underwritten by a panel of UK insurers. As such their cover will not be impacted by the crisis in Ireland.

The Post Office has been a particularly major provider of travel insurance, but this is underwritten by Ageas, formerly called Fortis, based in Hampshire. In any event, the Post Office itself is now regulated by the FSA, which should give customers access to the FSCS.Nevertheless, for peace of mind policyholders should make sure they have no insurance underwritten by any company operating out of Dublin.

Some consumers may have taken out life insurance or other savings or pension policies with Irish Life. If they have bought these policies and investments via a UK-based office or adviser they may still have recourse to the FSCS in the event of trouble. Ireland has an Insurance Guarantee Scheme and an Investor Compensation Scheme, but protection will not be equivalent to that in the UK.

Investments

The UK's leading insurance companies, including the Prudential, Standard Life and Aviva, all have offshore operations in Dublin, largely selling offshore bonds which can offer tax shelters to higher rate taxpayers. Essentially, these bonds allow tax to be deferred until a later date when the taxpayer may have seen their tax bracket fall. This money will be ring-fenced in other funds held in trust.

The Prudential's investments, for example, which were inherited from Scottish Amicable, are invested in the Pru's with-profit fund based in the UK. Standard Life's investments will be held in a range of funds, of Standard Life and other fund managers. Nevertheless, the money will be safe, although the share or unit prices could be impacted by the stock market and economic turmoil.

Elsewhere, Dublin has become a popular base for launching funds, with around 4,700 worth more than 800 billion. They were encouraged to do so by a more lax regulatory regime and lower corporation tax. It was a particularly popular destination for exchange traded funds, which are low-cost trackers. Again, all these funds should be held in trust and therefore ring-fenced from Ireland's current problems.

Financial commentator Justine Modray said: "While Ireland's economic woes might hurt these investments due to falling stock markets, they should be safe from fund companies or the Irish economy going bust because funds must ring-fence investors' money from the fund company itself. The only thing I expect to change is fewer fund companies deciding to set up shop in Dublin if the Irish government hikes taxes and/or the economy remains unstable."

Celtic Tiger funds

Funds investing in Ireland were flavour of the month and money piled in during the early years of this decade. For a while investors did well on the back of the property and banking boom. However, if you still have cash invested, there are few options but to lick your wounds and crawl away.

Justin Urquhart Stewart, a director of Seven Investment Management, said: "An awful lot of cash in these funds was invested in property and banking. The recovery here will be painfully slow. Investors have few options but to cut their losses."