When you have worked hard to build up your savings, it is important to understand what level of protection you will receive in the event the financial institution is unable to repay you your money.
For peace of mind, you should establish what investor protection you have with each of your banks, and how it works. The same applies for capital you have held in other financial institutions, like investment firms and insurance companies, in the event of institutional failure.
So, what protection do banks offer?
Under an EU directive, each EU country provides a bank deposit guarantee of €100,000. In the event a bank fails, your national deposit guarantee scheme (Fundo de Garantia de Depósitos in Portugal) will refund your savings, up to the limit of €100,000.
Savings above the €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 banking group, so you need to be careful.
In the UK, accounts in regulated banks are protected by the Financial Services Compensation Scheme. The amount protected should be the same as offered in the EU and with effect from January 30, 2017 it is back up to £85,000. It had been reduced to £75,000 in 2015 to match the currency exchange rate at the time.
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 length of time each claim takes to process depends on a number of factors, some of which are entirely outside the FSCS’s control, but it will aim to pay compensation within seven days of a bank, building society or credit union failing. Any remaining claims, which are likely to be more complex, will be paid within 20 working days.
Since July 2015, the FSCS provides a £1 million protection limit for temporary high balances.
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 would need to rely on their local guarantee schemes, which offer lower levels of protection.
The Isle of Man provides compensation of up to £50,000 for covered banks. If a bank fails, a fund will be created to pay compensation to depositors. The maximum fund will be £200 million. There is no guarantee of when you will receive your compensation.
The limit in Jersey and Guernsey is also £50,000, capped at £100 million in any five-year period. An interim payment of up to £5,000 will be made within seven working days and the balance of compensation paid within three months.
Many savers with larger cash deposits have spread them out over more than one bank. It results in more paperwork but is worth it.
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 should the insurance company fail.
Luxembourg provides very robust protection for life assurance policy holders. The cornerstone of its investor protection regime is the legal requirement that all clients’ assets must be held by an independent custodian bank approved by the state regulator.
The bank is required to ring-fence clients’ securities (investment funds, shares, bonds, etc) so that they are off its balance sheet. If the bank fails, these securities remain in segregated client accounts – 100% of the policy holder’s securities are therefore protected. This does not include cash deposits, but cash held in monetary funds are treated as securities and so are protected.
In any case, you should always ensure you have adequate diversification across different investment assets. This reduces risk as well as increasing the potential for improved returns.
As always, your savings and investment decisions should be based around your personal objectives, circumstances, time horizon and risk profile. Talk to a professional financial adviser for tailored advice on protecting your savings and suitable asset allocation for you.
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
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.