Q&A: Changes to the Financial Services Compensation Scheme

New rules and changes due to be introduced in January will mean that consumers will have greater cover and the comfort of faster payouts if they need to turn to the Financial Services Compensation Scheme (FSCS).

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Yet according to a moneysupermarket.com poll, almost 60% of Brits are unaware of the impending changes. We explain what is happening and look at how the new rules will affect you...

What is the Financial Services Compensation Scheme?

The FSCS was set up in 2001 and deals with claims against authorised financial services firms that are unable or likely to be unable to pay claims against them. This will generally be because a firm has stopped trading and has insufficient assets to meet claims, or is in insolvency.

The scheme covers insurance companies, deposit-takers and investment firms. Up until 2008, it had paid out £1billion in compensation, but the global financial crisis meant that in the six month period between September 2008 and March 2009, it paid out a massive £21billion.

How much protection do I have?

Under the old rules, everyone had £50,000 protection (£100,000 for joint accounts) in the event of a bank collapse, but from January 1, 2011, savers will receive protection in line with other European depositor schemes at €100,000, which will be fixed at £85,000 for the next five years (£170,000 for joint accounts).

Why are things changing?

It’s all thanks to an EU directive to bring the UK into line with the rest of Europe, so that compensation is simpler. The new higher limit will cover more than 98% of people in the UK with money in a bank, building society or credit union.

And is it true that payouts will be made more quickly?

Yes, faster payout rules will come into force on 31 December 2010. This will mean that individuals and small businesses will receive compensation much more quickly, and it is a legal requirement that all payments are received within 20 days, as required under the European Deposit Guarantee Schemes Directive. The FSCS is aiming to pay most claims in seven days with only more complicated claims taking longer.

If I have debts and savings with the same bank, will my savings be used to clear the debts before compensation is paid?

Not any more. Previously any outstanding loan or debt held with a firm would have been deducted from your savings before compensation was paid out. The new rules mean that from January 1, 2011, any deposits you have will be ring-fenced if you have savings and debts with the same company, and so will be protected in full up to the FSCS limit.

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What about offset mortgages?

If a savings account is kept separate from the mortgage balance, it will be dealt with separately and you would be eligible for compensation in the event that the bank runs into trouble.

However, if the deposit account is actually combined with the mortgage account and operated as one large overdraft, the FSCS would have to treat it as an overdraft and no compensation would be payable. It is important therefore, that you understand exactly how your offset mortgage works – if in any doubt, ask your provider about compensation so you know where you stand.

What if you are investing offshore?

The FSCS does not cover deposits outside the European Economic Area, or the Channel Islands of Isle of Man. The Channel Islands and Isle of Man have their own compensation schemes in place, so if you are thinking of investing offshore, make sure you check and know what protection you have.

The Isle of Man’s Depositors' Compensation Scheme, for example, offers maximum compensation of £50,000 of net deposit per individual or £20,000 for most other categories of depositor. There is no guaranteed minimum compensation. If you have a mortgage and savings with the same provider and that provider goes bust, then your savings will be used to pay off your debts and you will only be able to claim compensation for any remaining amount.

In the event that a Jersey bank should fail, the Jersey Depositor Compensation Scheme will pay compensation to depositors up to a maximum of £50,000 per depositor per Jersey banking group. The Jersey Depositor Compensation Scheme will pay the first £5,000 of a claim within seven working days and the balance within three months of receiving a valid claim. Deposits must be held in Jersey with banks regulated by the Jersey Financial Services Commission.

Banks licensed by the Guernsey Financial Services Commission are covered by the Guernsey Banking Deposit Compensation Scheme, which provides compensation of up to £50,000 per person per licensed bank. Compensation will be paid within three months of a bank failure.

Anything else I should know?

Yes – even though the UK protection limit is increasing to £85,000, it's still important savers check which banking group their accounts sit with, as two seemingly distinct providers might fall under the same banking umbrella.

For example, First Direct is owned by HSBC, meaning any customer who has money saved with both providers will only be protected up to £85,000. Read our article ‘Who owns who?’ to find out which banks operate under the same license.

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