Prior to September 2007, not many savers gave much thought to bank deposit guarantees. After the collapse of Northern Rock and the following banking crisis compensation limits became rather more important. Nevertheless research from the UK Financial Services Compensation Scheme (FSCS) at the end of last year found that four out of five savers did not know what their protection limits are.
Are you aware of what level of protection you will receive in the event there are problems with your bank? Do you know if you would get your money back quickly or if you may not have access to your funds for some time?
For peace of mind you should establish what investor protection you have with each of your banks, and how it works. The same applies for capital you have held in other financial institutions like investment firms, insurance companies etc in the event of institutional failure. If you have any concerns about the level of protection you should establish if there are other institutions or investment structures which offer a higher level of protection, or if there are steps you can take to feel safer.
Do we really have reason to be concerned about our protection limits? While it is unlikely that a major bank will be allowed to fail, we can never say never, particularly if the government does not have the resources to rescue it. And smaller banks are less likely to be rescued – last year a small bank in the UK did fail and a few depositors lost some of their savings which amounted to more than the FSCS deposit guarantee.
In February 2012 ratings agency Fitch lowered its rating on four big Spanish banks. Standards & Poor’s cut its rating for the whole Spanish banking industry, saying investor confidence remains fragile and it anticipates further episodes of illiquidity and volatility in the funding markets over the medium term. Barclays Portugal has sent employees “amicable termination proposals” because the level of its “banking business has been significantly reduced”.
Following stress tests last year, European banks must meet increased capital ratio requirements set by the European Banking Authority. The EBA has determined banks need to raise €115 billion by the end of June to strengthen their balance sheets and protect themselves against the risk of Eurozone sovereign debt defaults.
So, what protection do European banks offer?
New rules were introduced across Europe from 31st December 2010 whereby each EU country had to increase their bank deposit guarantee to €100,000. In the event a bank fails, your national deposit guarantee scheme will refund your savings, up to the limit of €100,000. If you have savings above that amount the excess may be lost, though you may receive additional funds following any distribution of assets as part of the insolvency process.
Deposits are covered per depositor, so married couples with joint bank accounts have €200,000 protected. The guarantee is per banking group, so if you have, for example, €50,000 in a current account and €150,000 in a savings account with the same bank, only half of your money is protected. Note that one banking group can have banks with different names, so if you use more than one bank you should check if they are part of the same group.
It could take you up to six weeks to receive compensation, but under proposals this should reduce to seven days by the end of 2013.
In the UK the deposit compensation limit is now £85,000 (to match Europe’s €100,000). Again, this is per depositor, so if you have an account in joint names with your spouse you each have £85,000. Again, the guarantee applies per authorised firm, so if, for example, you had accounts at both Halifax and Bank of Scotland, your combined protection is £85,000.
The FSCS aims to pay compensation within seven days, though it may be extended to 20 for complex cases.
Many expatriates have savings in the Channel Islands or Isle of Man. Banks in these jurisdictions are not covered by the UK FSCS, even if they are divisions of UK banks. Instead you will need to rely on the local guarantee scheme.
The compensation limit in the Isle of Man, Jersey and Guernsey is just £50,000. They also have an overall “cap” on the amount they need to pay out. In Jersey and Guernsey the maximum they will pay out is £100 million in any five year period. If claims exceed this, compensation will be reduced pro rata. The Isle of Man’s cap is higher at £200 million.
Jersey and Guernsey will aim to pay compensation within three months, while the Isle of Man has no time limit for payment - how much you receive and when would depend on the size of the failed bank and the amount of funding contributed to the Depositors’ Compensation Scheme.
Many savers with larger cash deposits have spread them out over more than one bank. Others have opted to move capital into arrangements which provide a higher level of investor protection than banks can offer. For example, if you have an investment bond issued by a Luxembourg regulated insurance company, your investment assets are completely protected should the insurance company fail.
For advice on asset protection and reassurance that your money is protected as much as possible, consult a wealth manager like Blevins Franks.
By Bill Blevins, Managing Director, Blevins Franks
15th February 2012