What level of protection do banks offer? We outline the bank deposit guarantee schemes in the EU and UK.
When you have worked hard to build up your savings, it is important to know where you stand if the financial institution holding your money fails. While there are EU and UK compensation schemes, they do have limits.
For peace of mind, you should establish what investor protection you have with each of the financial institutions you use – banks, investment firms, insurance companies – in the event of institutional failure. Where necessary, take steps to improve your position.
Portugal and other EU banks
Under an EU directive, each EU country provides a bank deposit guarantee of €100,000. In the event a Portuguese bank fails, the national deposit guarantee scheme – Fundo de Garantia de Depósitos (FGD) in Portugal – will refund your savings, up to the limit of €100,000.
This means savings above €100,000 could be lost if your bank fails. You may receive additional funds following any distribution of assets as part of the insolvency process, but this would depend on the bank’s situation at the time.
Deposits are covered per depositor, so couples with joint accounts have €200,000 protected.
Note that the guarantee is per banking group, not per bank account or even per bank – some banks with different names form part of the same group, so you need to be careful.
Under certain circumstances (for example, after selling a property), you may be eligible for higher protection for temporary high balances. You will need to look at your local scheme to see what the higher guarantee is and how long is considered “temporary”.
In Portugal, the time frame reduced from 15 working days to 10 from January 1, 2021 and will be seven from 2024.
In the UK, accounts in regulated banks are protected by the Financial Services Compensation Scheme (FSCS). The amount protected matches that offered by the EU and is currently £85,000.
As in Europe, protection is per depositor – so accounts in joint names are protected up to £170,000 – and per banking institution. An institution is not the same as a bank; Halifax and Bank of Scotland, for example, are part of the same institution.
The FSCS also provides a £1 million protection limit for temporary high balances (up to six months).
The FSCS aims to pay compensation within seven days of a bank or building society failing, though more complex cases will take longer.
The impact of Brexit
According to the FSCS website, there are currently no plans to change the UK’s £85,000 limit post-Brexit. It also explains that its protection “is not dependent upon the depositor’s place of residence, but where the bank, building society or credit union holds the deposit”.
As such, nothing changes for UK nationals living in the EU with savings in a UK-authorised bank. However, since January 1, 2021, protection for deposits held in EU/EEA branches of UK firms are now covered by the local EEA deposit guarantee scheme in that country, and no longer by the FSCS.
UK offshore centres
Banks in the Channel Islands and Isle of Man are not covered by the UK scheme, even if they are divisions of UK banks. Instead, you rely on their local guarantee schemes, which offer lower levels of protection.
The Isle of Man’s Depositors’ Compensation Scheme (DCS) provides compensation of up to £50,000 for covered banks. The amount of compensation paid and timing of payments will depend upon the size, asset quality and profile of the failed bank, and the amount of funding contributed. The limit of Jersey and Guernsey’s depositors’ compensation schemes is also £50,000; they aim to pay compensation within three months of a bank failure.
Protecting your savings and investments
Many savers with larger cash deposits have spread them out over more than one bank. It results in more paperwork, but is worth it for peace of mind.
Others have opted to move capital into arrangements, which provide a higher level of investor protection than banks can offer. For example, if you have an investment bond issued by a Luxembourg regulated insurance company, your investment assets are protected if the insurance company fails. This is because Luxembourg banks are required to ring-fence clients’ securities – investment funds, shares, bonds etc. – so they are off its balance sheet. If the bank fails, these securities remain in segregated client accounts, meaning 100% of the policyholder’s securities are protected.
In any case, it is crucial to ensure you have adequate diversification across different investment assets. This reduces risk as well as increasing the potential for improved returns. And as always, your savings and investment decisions should be based around your personal objectives, circumstances, time horizon and risk profile. For the best results, take personalised, regulated advice on asset protection and a suitable tax-efficient investment approach for you in Portugal.
All information contained in this article is based on our understanding of legislation and practice, in the UK and overseas at the time of writing; this may change in the future.
By Dan Henderson
Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com