Prior to the recession, any well-known banking names running into trouble was almost unheard of. However, recent years have seen more than one bank collapse, which has made savers understandably nervous about whether or not their money is safe.
Fortunately, there are safeguards in place to protect savers’ hard-earned nest eggs.
How your money is protected
If your money is held with a UK institution which is regulated by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority, then you will have access to the Financial Services Compensation Scheme (FSCS) in the event that something goes wrong.
Under the FSCS the first £85,000 (as of January 2017) of your savings (or £170,000 if your money is held in a joint account) is protected in the event that the bank or building society goes bust. This threshold is the same as the €100,000 compensation offered to savers with European banks.
Remember that the £85,000 limit applies per institution and not per account. That means if you have, for example, £50,000 in an easy access account and £50,000 in a fixed rate bond, both held with the same bank, you’d stand to lose £15,000 in the event that the bank went bust, because you’d only be compensated for a total of £85,000.
If, therefore, you have substantial savings, you should make sure that you don’t hold more than the maximum £85,000 with any one bank.
Under the FSCS the first £85,000 of your savings is protected in the event that the bank or building society goes bust.
Understanding bank licences
Even if you do spread your savings between different banks, your money could still be at risk if you hold them with banks which operate under the same licence.
Some banks operate several different subsidiaries which – though may have different names – share just one banking licence. This means that if you hold savings with two different institutions, but they aren’t registered with the FCA separately, you will still only be protected up to £85,000 and not up to £170,000 as you might assume. If you have more than this savings amount to worry about it is imperative to check who ultimately owns the banks you save with so that you know exactly how much protection you have.
For example, HBOS, which is part of the Lloyds Banking Group, has Halifax, Intelligent Finance, Birmingham Midshires, Bank of Scotland, The AA and Saga all operating under its licence.
If you had £85,000 invested in a Birmingham Midshires account and £85,000 in a Bank of Scotland account, only half your savings would be protected.
However, to make things even more confusing, the Lloyds Banking Group has two licences. So, if you have £85,000 in savings with Lloyds and £85,000 in an account with Halifax, these savings would be protected in full, because they are registered under separate licences with the FCA.
Many overseas banks have subsidiaries in the UK, but this doesn’t necessarily mean they’ll be registered with the FCA. If they are not, then your savings should be protected by the compensation scheme in the country where the savings provider originates from, but it’s always worth checking this before investing.
You should be able to find out whether the savings provider is registered with the FCA by contacting them directly, or you can check the FCA's website.
If you’re investing with a bank which originates from outside Europe, then it must be fully regulated in the UK to trade, so you will be protected by the FSCS.
All European banks must offer compensation of €100,000.
Saving with NS&I
Savings invested with National Savings and Investments (NS&I) are protected in full as NS&I is backed by the government. That means if you have £250,000 invested there, it will be protected, so you don’t have to restrict the amount you save to £85,000.
However, it’s worth noting that NS&I’s accounts don’t tend to pay the most competitive returns, so stashing all your savings there just because of the protection offered is unlikely to be a sensible strategy.
What else does the FSCS cover?
The FSCS also covers insurance, investments and mortgages, but again only up to certain limits depending on the kind of product you have.
However, some investments, such as fixed term investments or structured products are not covered by the FSCS. Money invested via peer-to-peer lending sites is also not protected by the FSCS, although most peer-to-peer lenders have their own provision funds to protect savers in the event that the borrower defaults on their loan.
The peer-to-peer lending sector came under FCA regulation in April 2014. This has resulted in further safeguards for investors, as sites must ensure they have arrangements in place for loan agreements to continue if the platform goes bust.
Investors also have access to the Financial Ombudsman Service (FOS) if they are unhappy with their treatment from a peer-to-peer lender.