How are your savings protected? Bank deposit guarantee schemes

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Bank deposit guarantee schemes – EU banks provide a deposit guarantee of up to €100,000, and the UK has a similar £85,000. In Jersey, Guernsey and Isle of Man, however, compensation is limited to £50,000.

With the global banking industry back in the news again, this is a good time to look at what bank guarantees are in place in the event of institutional failure.

When you’ve worked hard to build up your savings, for peace of mind, you should always establish what investor protection you have with each of the financial institutions you use – not just banks, but also investment firms, insurance companies etc.  Where necessary, take steps to improve your position.

So, what protection do banks offer?

EU banks

Under an EU directive, each EU country provides a bank deposit guarantee of €100,000. In the event a bank fails, your national deposit guarantee scheme will refund your savings, up to the limit of €100,000.

Savings above the €100,000 could be lost if your bank fails.  You may receive additional funds following any distribution of assets as part of the insolvency process, but this would depend on the bank’s situation at the time.

Deposits are covered per depositor, so couples with joint accounts have €200,000 protected.  Note that the guarantee is per banking group, not per bank account or even per bank – some banks with different names form part of the same group, so be careful.

Under certain circumstances (for example, after selling a property) you may be eligible for higher protection for temporary high balances.  You will need to look at your local scheme to see what the higher guarantee is and how long is considered “temporary” (in France and Spain, for example, it is just three months).

France and Cyprus aim to make the payable amount available within seven working days.  In Spain and Portugal, the time frame is currently ten days but it will improve to seven from 2024.

UK banks

In the UK, accounts in regulated banks are protected by the Financial Services Compensation Scheme (FSCS).  The amount protected matches that offered by the EU and is currently £85,000.   It also provides a £1 million protection limit for temporary high balances (up to six months).

Protection is per depositor (accounts in joint names are protected up to £170,000), and per banking institution.   An institution is not the same as a bank; Halifax and Bank of Scotland, for example, are part of the same institution.

The FSCS aims to pay compensation within seven days of a bank or building society failing, though more complex cases will take longer.

According to the FSCS website, there are currently no plans to change the £85,000 limit post-Brexit. It also explains that its protection “is not dependent upon the depositor’s place of residence, but where the bank, building society or credit union holds the deposit”, so nothing changes for UK nationals living in the EU with savings in a UK-authorised bank. However, since 1 January 2021, protection for deposits held in EU/EEA branches of UK firms are now covered by the local EEA deposit guarantee scheme in that country, and no longer by the FSCS.

UK offshore centres

Banks in the Channel Islands and Isle of Man are not covered by the UK scheme, even if they are divisions of UK banks.  Instead, you rely on their local guarantee schemes, which offer lower levels of protection.

The Isle of Man’s Depositors’ Compensation Scheme (DCS) provides compensation of up to £50,000 per person for covered banks.  There is no time limit for the payment. The amount of compensation paid and the timing of payments will depend upon the size, asset quality, profile of the failed bank, and the amount of funding contributed. There is no standing fund for the DCS. It is funded if and when required by contributions from participating banks and the Isle of Man Treasury, capped at £200 million for a 10-year period.

The limit of Jersey and Guernsey’s depositors’ compensation schemes is also £50,000, capped at £100 million in any five-year period.  They aim to pay compensation within three months of a bank failure.

Protecting your savings and investments

Many savers with larger cash deposits have spread them out over more than one bank.  It results in more paperwork, but is worth it for peace of mind.

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 protected should the insurance company fail.

Luxembourg provides very robust protection for life assurance policy holders, the strongest in Europe.  The cornerstone of its ‘Triangle of Security’ investor protection regime is the legal requirement that all clients’ assets must be held by an independent custodian bank approved by the state regulator.   The bank is required to ring-fence clients’ securities (investment funds, shares, bonds, etc) so they are off its balance sheet.  If the bank fails, these securities remain in segregated client accounts. 100% of the policyholder’s securities are therefore protected.  This does not include cash deposits, but cash held in monetary funds are treated as securities and so are protected.

In any case, you should always ensure you have adequate diversification across different investment assets.  This reduces risk as well as increasing the potential for improved returns.

Further advice on bank deposit guarantee schemes and more

As always, your savings and investment decisions should be based on your personal objectives, circumstances, time horizon, and risk profile.  Talk to Blevins Franks for tailored advice on asset protection, effective diversification, and the tax-efficient investment arrangements available for you in your country of residence.

Contact Blevins Franks now.

All information contained in this article is based on our understanding of legislation and practice, in the UK and overseas at the time of writing; this may change in the future.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.