By David Kuo
Head of personal finance, fool.co.uk
David Kuo says it is natural to ask if our money is safe
Before the collapse of Northern Rock, hardly anyone had heard about the Financial Services Compensation Scheme (FSCS), let alone was aware of what it does.
Even those familiar with the scheme could never have imagined it would ever be called upon in their lifetime to compensate bank customers in the event of their bank failing.
But now that the genie is out of the bottle, it is natural for us to ask if our money is safe.
Bank customers whose balances fall within the FSCS limit of £50,000 can rest assured that their money is fully protected.
In the event of a bank failure, the compensation scheme will kick in to ensure that no one with less than £50,000 deposited with an authorised bank is out of pocket.
Additionally, couples with joint accounts are protected up to £50,000 each, or a total of £100,000.
So, anyone who has more than £50,000 in a bank account, and is worried about the safety of their money, should ensure that they spread their money around to avoid falling foul of the compensation limits.
It is also important to appreciate that the limit refers to an individual rather than an account.
In other words, if you have several accounts with the same bank, the FSCS will only pay compensation up to the limit of £50,000. It is per licence and not per account.
There is another condition to be aware of. The FSCS applies to a banking licence.
Put another way, if subsidiaries of a bank share the same bank licence, then the FSCS will only pay one claim of up to £50,000 per person.
Note that Halifax and Birmingham Midshires share the same bank licence.
So, you will only be allowed to claim up to £50,000 even if you have more than that in both. Some of the main high street banks and their associated subsidiaries include:
- Woolwich is a subsidiary of Barclays
- Halifax, Bank of Scotland, Birmingham Midshires, Intelligent Finance, the AA and Saga are subsidiaries of HBOS
- First Direct is a subsidiary of HSBC
- Direct Line and Virgin Money are subsidiaries of Royal Bank of Scotland
- Cahoot and Bradford & Bingley are subsidiaries of Abbey
- Cheltenham & Gloucester is a subsidiary of Lloyds TSB.
With the number of consolidations that has taken place, it is doubly important to be aware of how mergers could affect your rights to compensation.
For instance, when the Abbey merges with Alliance & Leicester, the two banks will hold separate licenses, but Bradford & Bingley, which also merged with Abbey, has relinquished its licence.
When in doubt, always ask.
If you have a loan with the same bank that you save with, then your debts are set off against your savings before compensation is paid out.
The issue of safe savings has been heightened recently
By offsetting, you may not receive any compensation for your savings, but your loan will be reduced accordingly.
Consequently, savers who are salting away money may want to choose a separate bank that they have taken out a loan with to avoid losing their rainy-day fund.
Some overseas banks have opted for a passport scheme. This means that savers are covered by a compensation scheme in the banks' home country in the event of a bank failing, rather than the UK's FSCS.
Unfortunately, this has been found wanting in the case of Icelandic banks operating in the UK.
However, the scheme is beneficial to savers at ING, who gain from a higher level of compensation than is currently available in the UK. The Netherlands compensation scheme covers up to 100,000 euros, or £78,000.
Apart from cash investments, the FSCS covers stock market investments too. If you have money in an investment fund, you are fully covered for the first £30,000 of your investment and 90% of the next £20,000.
In other words, the maximum compensation is £48,000 if the fund should go bust.
If you have your money in a Self Invested Personal Pension (SIPP), then the level of compensation depends on how your money is invested. If it is wholly in cash, then you are covered up to £50,000, but if it is all in funds, then the limit is £48,000.
The solvency of a bank is dependent on its perceived solvency.
In other words, if enough people believe that a bank is in trouble, then it is likely that the bank will run into problems.
It is therefore in the interest of banks, the government and the Bank of England as a lender of last resort never to allow this to happen. And thus far, they never have.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.