However, nervousness persists and as some savers withdrew money from Halifax Bank of Scotland (HBOS) accounts last week after the share price plunged, there were worries that we would see another bank run.
As a result a merger has been agreed between HBOS and Lloyds TSB. Under normal circumstances the merger between Lloyds TSB wouldn't be allowed due to competition rules, but such is the fragility of consumer confidence that the Government and Financial Services Authority both supported the deal in a bid to secure the future of HBOS shore up confidence among savers.
With the problems in the banking sector far from over, caution is likely to remain among retail savers. Yet there appears to be confusion surrounding what protection you get if a bank or building society goes bust. We answer your questions.
Will I get my money back if my savings provider collapses? Consumers have a certain level of protection under the Financial Services Compensation Scheme (FSCS) - the first £50,000 that is saved with any one institution is guaranteed. If you have cash in a joint account the first £100,000 is protected. Therefore, any savings up to this amount will be returned to you if your provider goes bust.
Are there any exceptions? Yes. Northern Rock and National Savings & Investments (NS&I) are both backed by the Government and as a result any money held with either institution is totally protected, regardless of the amount.
What if I have more than £50,000 in savings?For the majority of people, £50,000 is adequate protection but if you have more than that in savings you should look to spread it around between different institutions - the £50,000 limit applies to the provider and not the account. So if you have four savings accounts with the same bank only £50,000 would be protected. If however, you spread the money between four different institutions, you will have up to £50,000 guaranteed from each.
You need be wary however as the FSCS definition is that you get protection for each company independently registered with the Financial Services Authority (FSA). Some institutions such as HBOS offer savings accounts under a number of different brands - Halifax, Bank of Scotland, Intelligent Finance, Birmingham Midshires - as well as running the accounts offered by Saga and The AA. However, HBOS only has a single registration with the FSA so if you had savings accounts with Halifax, Birmingham Midshires and Saga, for example, only £50,000 would be protected.
Other institutions have separate registrations - Royal Bank of Scotland and Natwest, for example each have their own FSA registration, consequently you could have a savings account with each and would be protected up to £100,000.
When HBOS merges with Lloyds TSB, the two groups are expected to retain their FSA registrations so customers' savings would be covered up to £100,000. Similarly, Santander, which owns Abbey, is taking over Alliance & Leicester, but the two brands will keep their separate FSA registrations.
Our article ' Who owns who' will help you identify which brands are part of the same group, making it easier for you to spread your money around between different institutions.
What about catches to the terms of the FSCS protection? While the terms of the FSCS protect savings up to £50,000, there are a number of clauses you need to be aware of.
European passport scheme If your money is invested with a foreign bank, the process for recourse should that institution fail, may be slightly different than if it is with a UK institution. Some overseas banks are covered by the 'European passport scheme' - you still get the same level of protection, £50,000 per institution, but rather than claiming through the FSCS you have to claim through the compensation scheme in bank's country of origin. If there is any shortfall between the amount you receive back and the £50,000 cap, you would reclaim the residual amount from the FSCS.
Some of the high profile banks to which the European passport system applies include Anglo Irish Bank, Icesave, ING Direct and Akbank. However, the passport system doesn't apply to all overseas institutions - some of the big names are signed up to the FSCS. These include Kaupthing Edge, Firstsave and ICICI Bank.
Debts and savings with the same institution The other thing to be aware of is the 'netting off' clause, which applies if you have debts and savings with the same bank or building society. Say you have a mortgage and a savings account with a bank which went bust, the money you had in savings would be used to reduce the size of the debt, rather than being returned to you through the FSCS. You would only receive money back in compensation if that amount you had in savings exceeded the value of the debt.
Offshore accounts Money held in offshore accounts such as those based in the Channel Islands, Isle of Mann and Ireland, are not covered by the FSCS. Unfortunately, thousands of savers who had money with Landsbanki Guernsey and Kaupthing Singer & Friedlander Isle of Man weren't aware of this until after the Icelandic banks collapsed and they are still waiting to hear how much they will get back.
If you are considering investing money in an offshore account, it is therefore essential to check whether there is a compensation scheme (and what protection it offers) in the jurisdiction where the account is domiciled.
The Irish Government has changed its legislation and said will now guarantee all deposits held in Irish banks until Septermber 28 2010. This 100% protection makes accounts with providers such as Anglo Irish Bank and Bank of Ireland, which provides the Post Office's savings accounts, a very attractive proposition for UK savers. With the exception of products from NS&I and Northern Rock you get greater protection than you do with accounts from British banks.
Last updated: October 29, 2008.
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