Financial Services Compensation Scheme

H M Treasury recently announced that the “Deposit Protection Limit” which is currently set at £85,000 for each depositor will reduce to £75,000 with effect from 1 January 2016.

As you may be aware, Deposit Protection is a means by which the Financial Services Compensation Scheme (FSCS) guarantee that any depositor with savings of up to the limit will be covered for any losses that customers of banks and building societies etc might suffer if those institutions fail.

The Deposit Protection Limit hit the headlines back in 2007 with the collapse of Northern Rock and the limit has been revised a few times since then.  The rules concerning this are governed by a European Directive (the Deposit Guarantee Schemes Directive) which sets the Deposit Protection Limit at €100,000 across the EEA.  Those member states that are not in the Eurozone, including the UK of course, have to convert the limit into their national currency and review this limit at least every 5 years so the limit can change depending on fluctuations in exchange rates.

Due to the recent increased strength of the UK economy and the increase in the value of the pound, the FSCS have reduced the limit to £75,000.  H M Treasury have announced the change 6 months in advance of it taking effect so that savers have the opportunity to spread their money around if necessary to remain within the limit.

It is worth remembering that it is always good practice to not “have all of one’s eggs in one basket”, no matter how attractive the basket may appear to be.  Account holders should also take care to ensure that, if they do decide to spread some of their savings across several banking institutions, that you are not simply moving it to a different bank covered by the same UK banking licence since if that were to be the case no extra protection would be available.  For example, Alliance & Leicester, Santander and Bradford & Bingley all operate under the same licence.

It is also worth remembering that the limit applies to each depositor for the total of their deposits with that particular bank or building society etc.  Therefore, in the case of a joint account the FSCS assumes that the money is held equally between the account holders and so a total of £150,000 (with effect from 1 January 2016) should be protected for accounts held in joint names between husband and wife for example.

H M Treasury state that even when the limit is reduced to £75,000 on 1 January 2016, over 95% of “retail depositors” will continue to be fully protected by the new Deposit Protection Limit and has also announced that, as well as small businesses being able to benefit, large companies and small local authorities (such as parish councils) will now also be able to benefit from the FSCS Protection.

As a final point to note, there is also protection available for certain “temporary” higher balances held by certain individuals whereby the FSCS will offer protection of up to £1m for funds held up to 6 months where those funds are held as a result of what they describe as “specified major life events” that lead to a large amount of money being held in a person’s account for up to that 6 month period.  This would include, for example, proceeds from a house sale or benefits payable under an insurance policy etc.  There are more examples on the FSCS website (www.fscs.org.uk) as to what types of proceeds could fall within this protection and further details of how to make a claim, which involves an application process and possibly producing supporting documents to the FSCS as evidence of the origin of the monies.

The above is for general guidance only and no action should be taken without obtaining specific advice