European banks provide a deposit guarantee of up to €100,000 (£85,000 in the UK). In Jersey, Guernsey and Isle of Man, compensation is limited to £50,000.
When you have worked hard to build up your savings, it is important to know where you stand if the financial institution holding your money fails.
For peace of mind, you should establish what investor protection you have with each of the financial institutions you use – banks, investment firms, insurance companies etc. – in the event of institutional failure. Where necessary, take steps to improve your position.
So what protection do banks offer?
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 you need to 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).
National deposit guarantee schemes
- Spain: Fundo de Garantia de Depósitos de Entidades de Crédito (FGD)
- Portugal: Fundo de Garantia de Depósitos (FGD)
- France: Fonds de Garantie des Dépôts et de Résolution (FGDR)
- Cyprus: Deposit Guarantee and Resolution of Credit and Other Institutions Scheme (DGS)
- Malta: Depositor Compensation Scheme
Timing of savings protection payments in the EU
France and Cyprus aim to make the payable amount available within seven working days.
In Spain and Portugal, the time frame reduced from 15 working days to 10 from 1 January 2021 and will be seven from 2024.
In the UK, accounts in regulated banks are protected by the Financial Services Compensation Scheme (FSCS). The amount protected should be the same as offered in the EU and is currently £85,000.
As in Europe, protection is per depositor (so 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.
Timing of savings protection payments in the UK
The FSCS aims to pay compensation within seven days of a bank or building society failing, though more complex cases will take longer.
The impact of Brexit
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”.
As such, 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 would need to rely on their local guarantee schemes, which offer lower levels of protection.
Isle of Man
The Isle of Man’s Depositors’ Compensation Scheme (DCS) provides compensation of up to £50,000 for covered banks.
There is no time limit for the payment of compensation. The amount of compensation paid and the timing of payments will depend upon the size, asset quality and 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 covered banks which participate in the DCS and the Isle of Man Treasury, capped at £200 million for a 10-year period.
Jersey and Guernsey
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’s ‘Triangle of Security
Luxembourg provides very robust protection for life assurance policy holders. 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. While this does not include cash deposits, 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.
As always, your savings and investment decisions should be based around 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.
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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.