Bank collapse was once easy to dismiss - then the credit crunch bit, global market turmoil hit, and logic was turned upside down. The UK government soon found itself bailing out Northern Rock; and not long after similar treatment by the US authorities followed for even bigger bank Bear Stearns. Add to this the Farepak debacle and every sensible saver should be asking themselves, "Is my money safe?"
This is a full savings safety-check up and Q&A, showing you how to ensure you're protected, maximise your safe savings, and the pitfalls to avoid.
A. No! There is a statutory scheme called the Financial Services Compensation Scheme (FSCS), but it only applies to regulated financial organisations. This was the big problem with the Christmas Savings Scheme Farepak, as it had no protection whatsoever; when it went bust the money was gone.
The main categories of safe savings are:
Bank and Building Society accounts.
If you want real safety the answer is a Bank or Building Society savings account, current account, small business account (with annual turnovers below £1 million) or credit union, but not savings stamps or hamper schemes. Specifically this is any UK registered bank (see later for how this impacts foreign banks UK subsidiaries).
Any cash ISA or Toisa.
These are simply a form of tax free savings account so they have the same protection. If you’ve got a Cash ISA or Tessa Only ISA (Toisa) you get exactly the same FSCS protection as in a savings account.
It's important to understand, we're talking about ‘saving’ not ‘investing’; if you put money in stocks and shares, funds that invest in them, and pension funds, then you’ve got a “risk based” investment NOT savings, and a different level of protection applies. If the product provider of an investment goes bust (e.g a bank offering a Shares ISA), you'll get the first £30,000 back, plus 90% of the next £20,000 (a total of £48,000); while pension and life assurance funds get the first £2,000 fully covered, plus 90% of everything else in them.
A. In the first incarnation of this article, in September 2007, my answer was "extraordinarily, unthinkably, ridiculously unlikely", now I believe it is "unlikely". The severity at which the credit crunch has hit the global financial markets has meant even the intervention from central banks around the world (e.g. the Bank of England, the US Federal Reserve) shows signs of struggling to keep some global banks propped up.
The temporary nationalisation of Northern Rock proves collapse is possible, though thankfully the government has so far had the stomach to bail it out, and things look to be improving. This was a huge statement of intent by the government that it'll take extreme action to avoid a bank going to the wall. Ultimately though it is taxpayers' money that's doing it.
The question remains if more banks did collapse, how deep into our coffers would the government be willing to dig? It's for this reason that focusing on the guaranteed protection scheme offered by the FSCS is so important.
Which banks/building society are most likely to go?
It's virtually impossible to pick any one out; and it's also irresponsible. Part of the original Northern Rock problem was one of sentiment; the bank's actual problems weren't huge, until wild-fire rumour meant people lost confidence, the queues to withdraw started, others saw them and panic ensued.
Many people made silly decisions, such as withdrawing money from cash ISAs which were protected, and losing their tax-free status. The knock on effect was a run on the bank, and from that moment it was doomed.
I've heard many rumours over the last few months, none of which stand up. Most are idle gossip from people with no real knowledge. Picking out a collapsing bank is an incredibly difficult thing to do; even the niche City specialists don't know, and it's certainly far from my own speciality.
Since October 2007, the Government has proposed legislation to make it easier for banks to hide minor problems to prevent a recurrence of Northern Rock; so if you hear rumour a bank's in trouble, wait until you've heard it from a reliable source. Knee jerk reactions don't help anyone.
The traditional way to assess the financial strength of a big public company is by its credit rating , AAA being the best and then graded downwards. Yet the sheer speed of change in the current financial contagion means even this isn’t a particularly reliable indicator. To check your bank’s strength use Standard & Poor's, though it's not overly simple to use; for a quick search try Fitch Ratings instead.
Any updates on bank safety will go in the free weekly MoneySaving email
A. All UK deposits in bank or building society savings products are covered by the Financial Services Compensation Scheme (FSCS). This is an independent fund set up by UK financial bodies and regulated by the Financial Services Authority (FSA) which promises that, in the event of a bank collapsing, you'd get some of your money back. This applies to everyone, no matter their age, including children. Remembering the exact amount you get is so crucial, it needs to be writ large.
"The first £35,000 you have saved per financial institution is protected."
This simple sounding solution has a slightly more complex underbelly, so let me run through some of the rules.
This only applies to defaults after 1 Oct 07.
The amount was changed on the back of Northern Rock; if an institution had defaulted earlier (only very niche players), you'd get 100% of the first £2,000 of your cash back and 90% of the next £33,000 on top; so you'd get £31,700 of the first £35,000 back.
The limit's doubled in a joint account.
Money saved in an account registered in two names receives twice the protection; that's therefore the first £70,000. Don’t get too excited though, this isn’t an extra allowance; it’s simply the same protection as if each account holder had a separate account.
The protection is per institution not per account.
This is a crucial point, the FSCS protection does not apply per account but per financial institution. In simple terms that means if you’ve got masses of savings all in one bank, but different accounts, then only the first £35,000 worth is protected.
Any debts with the same institution are subtracted from your savings
A piece of minutiae in the Financial Services Compensation Scheme rules dictates that if you have debts, such as a mortgage, loan or credit card with a bank that you also have savings with, any outstanding debts will be subtracted from the savings. For example if you have £20,000 in savings and a £15,000 loan, in the unlikely event that bank went bust you'll only get £5,000 compensation.
While at first glance this seems awful; in actual fact you’d be no worse off; as you would no longer owe the debt, even if it were sold on to another institution (or if your debts are bigger than your savings the amount owed would be reduced); although the flexibility of spending the savings on something else has disappeared..
The main negative is that the decision of whether to pay off your debts with savings has been taken out of your hands. While with most loans and credit cards this is a good thing (see the Should I pay off my debts? guide), if it’s mortgage debt it's not always a good idea (see Should I pay off my mortgage? guide). If this worries you, it's best to have your savings in a separate financial institution to your mortgage.
Any protection wouldn't be paid out instantly.
If in the unlikely event of your bank collapsing, you wanted to get money out straight away, it's unlikely to be possible. The best guess (as it's never happened) is it would take a few months for peoples' accounts to be processed, and the cash returned.
This isn't about separate banks, its about separate institutions.
Sadly, it's a bit more complex than it first appears. The technical definition is that you get the FSCS protection for each company independently registered with the Financial Services Authority (FSA). Over the years, many banks have merged or been taken over, blurring the lines over what actually constitutes a financial institution.
This means, bizarrely, that you only get one lot of £35,000 for the whole of HBOS, which is the combination of the Halifax, Bank of Scotland, Birmingham Midshires and others. Yet if you had money in the Royal Bank of Scotland, NatWest and Tesco, which are all part of the giant RBS banking conglomerate, you would be separately protected in each of them.
The 'What counts as a bank?' table.
The table below shows you which banks are standalone and which are the same institution. Any banks shaded in the same colour (except white!) share the protection, so if you have money in a combination of them you only get one lot of the FSCS safeguard. As an aid to the colour blind, institutions which share an FSA registration are also number coded in brackets.
Which savings providers count as one financial institution? |
||
Abbey (1) |
Alliance & Leicester |
Bank of Ireland (2) |
Barclays |
Bank of Scotland (3) |
Birmingham Midshires (3) |
Bradford & Bingley |
Cahoot (1) |
Capital One |
Chelt'ham & Gloucester (8) |
Citibank |
Clydesdale Bank (4) |
Co-operative Bank (5) |
Direct Line (6) |
Egg |
First Direct (7) |
Firstsave |
Halifax (3) |
HSBC (7) |
ICICI |
ING Direct |
Intelligent Finance (3) |
Kaupthing EDGE |
Landsbanki (Icesave) |
Liverpool Victoria |
Lloyds TSB (8) |
Nationwide |
Natwest |
Northern Bank |
Post Office (2) |
Royal Bank of Scotland (6) |
Saga (3) |
Sainsburys |
Scottish Widows |
Smile (5) |
Standard Life |
Tesco |
The AA (3) |
Virgin Money |
West Bromwich |
Yorkshire Bank (4) |
|
Last Updated: Mar 08. This table was compiled by checking the FSA registration number of each bank on their websites, and is based on the FSCS definition that each independently registered institution receives the £35,000 protection. |
||
A. Many non-UK banks now offer competitive savings products to UK consumers; it's been a boon for savers, as interest rates have been pushed higher. Some operate just as themselves, others via specially set up UK subsidiaries. These banks in the main are covered in exactly the same way as UK banks by the compensation scheme, so you'd get your money back.
The passport scheme
There is one exception called the 'passport scheme' which allows some European banks to have some of the compensation covered by their home country and the rest by the FSCS. Banks from outside the European Economic Area cannot take part in this and have to have the full FSCS compensation.
Home country compensation. The first amount would need to be claimed from that bank's home country's own compensation scheme.
-
UK Top up. Any amount not covered is topped up to £35,000 by the UK scheme. E.g. if the overseas scheme covered £20,000 the UK scheme would cover the remaining £15,000.
This does mean in the unlikely event if a European bank covered by the passport system went bust, you would have to try and claim some compensation from a foreign country. One of the most high profile banks in this position is Icesave; read Martin's full blog about Icesave safety.
| Non-UK banks: How do their compensations schemes work? (covers foreign banks in Top Savings Account or Top cash ISA article) |
||
| Name of bank | Amount covered outside UK | |
| 100% covered by the UK's FSCS (not part of the passport exception) |
- |
|
- |
||
- |
||
| Banks Using the Passport Exception | €38,000 (Netherlands) |
|
€20,000 (Ireland) |
||
€20,000 (Iceland) |
||
€38,000 (Netherlands) |
||
It's worth noting that if you have savings in a European bank that's currently fully covered by the FSCS, and it decided to opt for the passport scheme, it would have to inform you of the change.
One area deserves a strong warning though; it's possible for a European bank to operate in the UK only using its home compensation scheme. Depending on the amount covered under that scheme, your savings may be less protected than the £35,000 the UK's FSCS provides. In this situation, the foreign bank will not be FSA-regulated, and no banks currently mentioned on this site work that way; however if you find any foreign banks not mentioned here, be vigilant; ask it how its compensation works.
You can check out all banks on the FSA's website. Click through to the bank listings, click on the most recent date, and you'll get a huge PDF document. All banks in the 'Banks incorporated in the United Kingdom' category are fully covered by the FSCS, while institutions listed under the catchy title of 'Banks incorporated outside the EEA authorised to accept deposits through a branch in the UK' only have their home compensation scheme, unless they are on the FSCS top up list.
Important note about Kaupthing. In the FSA listings of passport scheme banks "Kaupthing Bank hf" is included. Don’t confuse this with the fully UK regulated “Kaupthing Singer & Friedlander” registration which is what covers the "Kaupthing Edge" account (part of the Top Savings article) meaning the savings account has the full UK protection.
Any new info on bank safety will go in the free weekly MoneySaving email
A.The FSCS doesn’t keep a pot of cash sitting ready and waiting. Instead, it has the power to operate a 'compulsory levy' on banks, insurers and others signed up to the scheme, as and when it needs the money. The advantage of this is it can pull cash from more than just the affected sector (i.e. if an insurer went down, while other insurers must contribute first, above a set level banks would be asked too) so funds should be available.
In theory, this means should the worst happen and a bank goes out of business, the FSCS has the legal power to call in funds from major financial institutions to cover the compensation needed to repay the first £35,000 lost by every saver
However, here it gets a little complicated. The FSCS has a cap on how much cash it can levy per year from financial institutions; from 1 April 2008 the overall capacity was set at just over £4 billion. Yet in the FSA’s review document (page 77), it admits that £4 billion wouldn’t even cover the twenty-fifth biggest UK deposit taker!
That means there’s not enough money in it for all the main high street names. This is a tad worrying to say the least, although of course the Government’s main focus is to avoid ever getting into a situation where the FSCS would need to pay out.
Yet it was something I wanted to deal with, so in May 08, as part of my ‘How Safe are your Savings’ programme I managed to get an interview with the Cabinet Minister responsible, Chief Secretary to the Treasury Yvette Cooper, MP. During the interview, as I pushed, I was told the government would ensure the £35,000 was paid out, yet I couldn’t get an answer on how… then just before the programme went out we got this statement
The Treasury gave us the following statement
"In the unlikely event a major bank became insolvent the Government would ensure that the FSCS has access to enough immediate funding to pay out depositors in a timely manner, through borrowing from the Government or Bank of England. The FSCS could then levy up to £4 billion per year from the financial services industry to cover the costs of compensation"
In plain English, this means that in the unlikely event of a bank collapsing and requiring more than £4 billion of compensation, the FSCS would be lent the money to compensate consumers up to £35,000 each, and it would have to pay back to loan in subsequent years, by continuing levies.
So this means, the £35,000 limit is still the prime safety limit to rely on in your planning.
A. If you've less than £35,000 don't worry, it's covered by the compensation scheme. Yet if you've more, the golden rule is don’t put more than £35,000 in any one financial institution; thus spreading your savings around a number of accounts. This a perfectly sensible strategy; just check on the chart above to ensure that they genuinely are separate institutions first.
The protection applies to every UK registered financial institution. There are usually nine or ten very competitive accounts, meaning you can save well over £300,000 in perfect safety. To help, at least ten top accounts are included in the Top Savings Account article, so pick the highest payer then work your way down. Plus any new best buys go in the free weekly email.
Is this going too far?
In many ways, while technically correct this strategy is a bit of an overkill, and it's more important to remember the "spread it about" bit than the "no more than £35,000 in any account".
For example, if you'd sold a house worth £500,000 and wanted to keep it somewhere for six months until you bought a new one, opening 15 separate savings accounts isn't that manageable, and you'd be sacrificing rates to do so. Yet to spread it amongst three, four or five does increase your protection in a more manageable way.
A. Yes, two; simply because they're both currently owned by HM government! All savings in Northern Rock and National Savings & Investments are 100% guaranteed. This does mean, if you've a lot of cash (well over the £35,000 amount) and the safety factor worries you, to put a portion of your cash in there for ultra safety is a reasonable, cautious strategy. Yet as the rates don't tend to be that good, be aware that by hedging for safety you're sacrificing interest.
Northern Rock.
Northern Rock was nationalised in February 2008 following its brush with the Credit Crunch Following that crisis, the Government stepped in to give a 100% guarantee on all ‘existing savings’ there, then extended it to new deposits too. In practice, this means anyone saving with Northern Rock, whether from before the crisis, since it, or even if you took your money out and now re-deposit it, will get back your whole balance, plus interest that you’re owed and any money that you subsequently deposit there in the future.
The best paying Northern Rock account is the e-Saver which pays 6% AER. See how this compares to the Top Savings Accounts.
National Savings and Investments (NS&I).
NS&I has always been a state-owned financial institution, meaning the Government has fully backed up any money in it. Whilst premium bonds are its most popular product, the average returns on them are quite poor and represent rubbish value for money (read Premium Bonds: Are they worth it?); its Direct ISA and Index-linked Savings are much better payers.
A. It’s hard to give any definite answer, but the signs are that some change is on the way. Initially after the protection threshold was increased to £35,000 on 1 October 2007, a further increase in the threshold to £100,000 was mooted, but talk of this has now died down.
Yet there is currently political discussion and consultation underway on the whole nature of savings protection. Many suggest the UK would be better moving to a more ‘US style‘ system where insolvent banks are effectively nationalised, and their assets used to refund money to savers. The handling of Northern Rock suggests this is a path the Government could choose, but we're a long way from hearing anything.
Interestingly though, it does leave us with the perverse scenario that when a banks doing well and is making huge profits it's a truly private affair, there to benefit its shareholders; yet when it goes badly it become 'everyones' responsiblity. What other sector has such a luxury?
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