Banking chaos - advice for savers

Fear is spreading among savers as customers of Heritable Bank, which is owned by Icelandic bank Landsbanki, became the first UK victims of a savings provider going into administration.

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The severity of the banking crisis worsened today with shares in UK banks plummeting amid fresh concerns over their financial stability and Iceland went into meltdown.

The Icelandic Government nationalised Landsbanki, the country’s second largest bank. The institution which offers savings accounts here in the UK under the Icesave and Heritable Bank brands, then stopped accepting deposits and withdrawals from British savers. It has been confirmed that Heritable Bank is now in administration and that customers will have to reclaim their money through the Financial Services Compensation Scheme. The position at Icesave has yet to be clarified, however a message on the Financial Services Compensation Scheme (FSCS) phone system states that Icesave customers are expected to have to claim their money through the compensation schemes.

I’m an Icesave customer, what can I do?
Unfortunately there is very little you can do until Landsbanki has confirmed what is happening. The bank insists it is still open for business and is not in liquidation so UK customers may well be able to access their money again.

The worst case scenario is that you will have to claim through the compensation scheme.

While the Icelandic Government announced 100% protection for savers’ money, this only applies to funds invested in Iceland. UK savers do not have the same protection. Instead the first £50,000 (£100,000 for joint accounts) is guaranteed.

Icesave is signed up to the European Passport System of the FSCS – this is the compensation scheme that protects savers who have money invested with providers that are registered with the City regulator, the Financial Services Authority (FSA).

The Passport System means that any Icesave customer has to claim through the Icelandic Depositors’ and Investors’ Guarantee Fund first (click on the Union Jack 'button' on the right hand side of the page to translate it into English). Up to €20,887 (about £16,200) is protected under the Icelandic scheme. If you have more than that in your account, you can claim the remainder, up to the £50,000 cap, through the FSCS. The FSCS's role is purely to top-up the shortfall so the first €20,887 can only be claimed from Iceland.

Is the situation the same with Heritable Bank?
No. Accountancy firm Ernst & Young has confirmed that Heritable Bank is in administration and that savers will have to reclaim up to £50,000 through the FSCS. Although Heritable is also owned by Landsbanki, it is signed up directly to the FSCS and is not part of the European passport System. Consequently, savers must claim directly through the FSCS – they do not have to go through the Icelandic scheme first.

The FSCS has set up a dedicated hotline for Heritable Bank savers. You can get advice on how to reclaim your money by calling 0845 730 0131. You can also find information by visiting the FSCS’ website.

The Treasury has confirmed that it will guarantee any savings above £50,000 so no Heritable saver will lose any money.

What about Kaupthing Edge?
Kaupthing Edge is owned by Kaupthing, Iceland’s largest bank. Currently, Kaupthing remains independent and savers can still access their money. However, if it collapses, you would claim directly through the FSCS – Kaupthing Edge is wholly registered with the FSA and the FSCS and is not part of the European Passport System.

Where is my money safe?

Nervousness is unsurprisingly spreading among savers and it is very difficult to advise what to do next because we have never experienced anything like this before. That said, this is not the time to panic.

Remember, the first £50,000 invested with any institution that is registered with the FSA is totally protected (£100,000 for joint accounts). This applies per institution not per account so if you have more money than that with the one provider, spread it between different firms.

However, you need to be aware that some institutions operate a number of different brands, so you also need to know if all brands are registered separately with the FSA or whether there is one registration for the entire group. If it is the latter you will only have £50,000 protection across all the brands.

For example, HBOS offers savings accounts under the Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance brands as well as providing savings accounts for The AA and Saga, but it has a single registration with the FSA. This means that if you have a savings account with Halifax, and another with Birmingham Midshires, only £50,000 is protected. 

Clare Francis’ article 'How to keep your savings safe' explains how the compensation scheme works in more detail and her article 'Who owns who?' provides a table showing which institutions have their own registrations with the FSA and which are part of a wider group. When you understand who owns who, you can spread your money around to ensure it is all totally protected.

Can I have my money with the same provider and ensure it is all guaranteed?
Yes. If you don’t want to diversify between providers there are a number of homes where your money is 100% guaranteed.

Savers have been pulling money out of UK banks and building societies and are reinvesting it in accounts from Irish providers such as Anglo Irish Bank and Bank of Ireland, which runs the Post Office’s savings accounts. The reason for this is the Irish Government’s announcement last week that it will guarantee all money invested by retail savers until September 28 2010.

Here in the UK, savers have total protection with National Savings & Investments (NS&I) and Northern Rock because both are backed by the Government. However, in return for the security you will have to sacrifice rates. NS&I has cut rates on some of its products to discourage large inflows of new money. Last week, Northern Rock pulled some of its leading rates in a bid to reduce volumes of new money coming in to the bank. Under the terms of its nationalisation it can have no more than 1.5% of the country's retail deposits.

Click here to compare savings rates.

Click to access the Financial Services Compensation (FSCS) website.

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