The banking panic last week didn’t lead to queues and withdrawals. But you’d do well to ensure that your cash is protected.
The UK bank protection regime is under review and the protection limit and some of the rules may change in the next few months. For now, this is how the system works.
Banks regulated by the Financial Services Authority have to provide protection for depositors. Banks cannot operate in the UK without authorisation from the FSA, so this means all banks are covered – though not all banks are equal.
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Increase to guarantee is on the cards
Deposits are covered up to a limit of £35,000 per individual with a particular bank or group of banks (see below). The upper limit is under review and is likely to be raised to £50,000. In the case of National Savings & Investments and Northern Rock (owned by the government) there is no upper limit. Because the limit is per individual, joint accounts of up to £70,000 are fully covered.
The limit applies to all accounts with a bank or group of banks operating under the same banking licence. Halifax, Bank of Scotland and Birmingham Midshires, for example, all come under one licence and if you held more than £35,000 in total with this group, the compensation limit would be £35,000.
This rule is under review and may well be changed, since you can only find out what the terms of a bank’s licence are by checking with the FSA website.
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Mortgages and loans are offset
If you have a mortgage and a deposit with the same bank or banking group, the amount of your savings (up to £35,000) are deducted from the mortgage instead of being paid in cash. Offsetting is under review and is likely to be abolished.
Most UK banks are authorised and regulated by the FSA. This includes foreign banks that have set up a UK banking subsidiary company. So Heritable Bank, ICICI and Firstsave, all subsidiaries of foreign banks, are fully covered up to £35,000 because they are UK companies regulated by the FSA.
Some other banks set up branches in the UK. In this case the bank is regulated by the FSA but is not authorized by it, and depositors are covered by the home country’s depositor protection scheme. If the limit on this is lower than the UK limit (as it is in the case of Iceland’s Landsbanki/Icesave), depositors would have compensation topped up to the UK level after getting their foreign compensation.
The Financial Services Compensation Scheme
My safety first guidelines
• Only deposit with banks regulated by the FSA
• Check your total deposits with a group of banks operating under the same licence
• Stick to the £35,000 per person limit
• If you have an offset mortgage, keep your savings deposited with the lender to under £35,000
• Avoid banks where you would have to get compensation from outside the UK
• Carefully check the compensation arrangements for any offshore accounts. Do not assume you are covered by the parent bank’s UK compensation arrangements - usually you are not.
