Bank clients across Europe have their savings protected in the event of bank failure. There is a limit to this deposit guarantee, and the UK’s limit will be reduced from £85,000 to £75,000 from January 1, 2016.
During the banking crisis, the EU issued a directive to ensure that all European countries have a guarantee scheme to refund bank depositors up to €100,000 should the financial institution be unable to pay claims against it, for example if they have stopped trading or been declared in default.
This was designed to give savers peace of mind and prevent a run on a troubled bank.
Portugal has the Fundo de Garantia de Depósitos, while the UK has the Financial Services Compensation Scheme (FSCS).
The UK’s limit is set to a Sterling amount equivalent to €100,000, which was £85,000 at the time in December 2010.
Under the EU directive, the Bank of England’s Prudential Regulation Authority (PRA) is required to recalculate the FSCS limit every five years. The process and timing is specified by the directive and is not at the PRA’s discretion.
On July 3 the PRA announced that it will reduce its guarantee to £75,000 to be in line with the current exchange rate. The euro has fallen against the pound in recent months, impacting the deposit guarantee.
The current limit of £85,000 will be maintained until the end of 2015. This gives depositors time to plan and adjust to the change if they wish, to ensure their funds have suitable protection.
This is the first time that the UK guarantee has been cut. Back in 2007 only the first £2,000 plus 90% of the next £30,000 was guaranteed. This was increased in stages through the financial crisis, reaching £85,000 in 2010.
A second, more positive change in the UK is that from July 3 depositors with temporary high balances will be protected up to £1 million for six months from the date of deposit. This protects people who have sold a property, received an inheritance etc, until they have time to move their funds into other arrangements or spread the risk between institutions.
For both Portugal and the UK’s compensation scheme, savings above the guarantee limit 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.
The guarantee is per individual, so where a couple holds an account in joint names it is protected up to €200,000/£150,000.
Note however that where different banks form part of the same banking group, the guarantee limit covers the whole group, not the individual bank.
Many expatriates in Portugal have savings in Jersey, Guernsey or Isle of Man. It is important to note that banks in these jurisdictions are not covered by the UK FSCS, even if they are divisions of UK banks, or by the European directive.
If a bank there failed, you would need to rely on the local guarantee scheme, where the compensation limit is £50,000. They also have an overall cap on the amount they have to pay out. Jersey and Guernsey will aim to pay compensation within three months, while the Isle of Man has no time limit.
For peace of mind, it is advisable to keep bank deposits per banking group below the compensation limit in that jurisdiction.
The only certain way for investors to achieve security from institutional failure is through a state controlled investor protection regime. Luxembourg stands out among EU states with its strong culture of investor protection. It has a regime that provides maximum security to investors without limit.
To protect your capital, you also need to consider the risk/return relationship with any asset, whether it is shares, property or cash in the bank. You could be exposed to more risk than is justified by the return potential of the asset. With interest rates so low, depending on the amount of money you have in the bank and your circumstances and objectives, there may be better places for your money.
It has always also been very important to diversify your investable capital over different assets. This reduces risk. You need to think of cash as an investment asset in the same way as shares, bonds and property, and have suitable diversification to spread the risk.
As always, your savings and investment decisions should be based on your personal objectives, circumstances, time horizon and, importantly, an objective assessment of your appetite for risk.
Speak to an experienced wealth manager to get tailored advice on asset protection and suitable asset allocation for you.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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