UK deposit guarantee to increase  But are your savings cover.jpg

UK deposit guarantee to increase  But are your savings cover


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Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

THE RUN on Northern Rock last September was the first on a British bank for 140 years.   UK Chancellor, Alistair Darling, is obviously keen for it to be the last and is taking steps to persuade people that their savings are protected. On July 1, he announced plans to increase the guarantee on savers’ deposits from 35,000 to 50,000 pounds sterling, the second increase since he became Chancellor.

This guarantee does not cover offshore banks in the Isle of Man, Jersey, Guernsey and Gibraltar, where many expatriates have their savings. These jurisdictions impose their own rules.

Confidence in British banks took a tumble after Northern Rock had to be rescued. According to National Statistics, the percentage of household income saved during the first quarter of this year fell to just 1.1 per cent, the lowest in almost half a century.

Bradford & Bingley’s plight will not help confidence. Texas Pacific Group was due to buy 23 per cent of the bank, but pulled out after learning that Moody’s was about to downgrade the bank for the second time in five weeks. The stricken bank will now receive a capital injection of around 400 million pounds sterling from investors Standard Life, Legal & General, Prudential and Insight (all HBOS subsidiaries).

Deposits in British banks and building societies are protected by the Financial Services Compensation Scheme (FSCS).  Prior to last October, the first 2,000 pounds sterling of your savings would be returned in full should a bank collapse, then 90 per cent of the next 33,000 pounds sterling – i.e. a maximum of 31,700.

Following the Northern Rock collapse, Darling raised this limit to 100 per cent of the first 35,000 pounds sterling and launched a consultation on Britain’s rules on guaranteeing deposits.  It was reported that he would like to see compensation increased to 100,000 pounds sterling.

This figure would have been unpopular with banks, and the amount finally announced was half that, increasing by 15,000 to 50,000 pounds sterling. According to the Treasury this will protect 60-65 per cent of deposits.

This compensation applies per person, per bank, so if someone has two accounts at the same bank, for example 75,000 pounds sterling in one account and 25,000 pounds sterling in the other, he will only receive a total compensation of 50,000 pounds sterling. The same rule applies to subsidiaries of a group of companies – deposits spread over the subsidiaries are only covered by one maximum allocation of compensation per person. HBOS Group includes the Bank of Scotland, Halifax, Birmingham Midshires and Intelligent Finance. The RBS Group includes NatWest, the Royal Bank of Scotland, Direct Line and Ulster Bank.

On announcing the new limit, Darling said: “No system of regulation can or should prevent the failure of each and every institution but we must do everything possible to prevent problems which could pose a wider threat to stability.”

There had been suggestions that banks would be forced to pay billions of pounds upfront into a “compensation pot”, so that the money would be available to repay savers if needed.  However, banks made it clear they would resist such a move (and that they may have to pass the cost onto customers via higher interest rates) and also called for a ‘sensible’ limit on the level to be guaranteed. Darling appeased the banks, believing that forcing them to pay out now, at a time when they are already struggling with the credit crunch, would be too damaging.

Instead, in the event a bank does collapse and compensation needs to be paid, the bill will be initially footed by British taxpayers.

Compensation will be paid within seven days, and the amount eventually refunded through the sale of the bank’s assets (which could take years) and a levy imposed on other banks.

The Treasury is however drafting legislation to give it powers to introduce pre-funding ‘if considered appropriate in the future’.

The British Bankers’ Association welcomed the decision. “We’re pleased there is going to be a further period of reflection. This is the biggest change to banking regulation in 10 years and we don’t want to rush into it.”

Others are not impressed that banks have been let off the hook for their mistakes. The Liberal Democrats’ Treasury spokesman, Vince Cable, said “the only way this can happen is for the banks to make ‘up front’ payments into the fund. We must be clear that deposit protection is the responsibility of the banks, not the taxpayer.”

Under the new proposals, the Bank of England will also be allowed to provide banks with liquidity in secret.

Consultation on new rules ends on September 15 and the Bill should be introduced in October.  If passed, it should become law by February.

Offshore banks

The Financial Services Compensation Scheme applies to banks in Britain authorised by the Financial Services Authority (FSA).  This includes foreign banks based and authorised in the UK. British bank subsidiaries in the European Economic Area (EEA) are covered by the scheme.

The Channel Islands and Isle of Man are not in the EEA and their compensation rules will apply, as follows:

Isle of Man – The Depositors’ Compensation Scheme will refund 75 per cent of up to 20,000 pounds sterling of net deposits per depositor per bank, if the bank fails. The maximum compensation payable is 15,000 pounds sterling per depositor.

Gibraltar – The Deposit Guarantee Scheme protects the lesser of 18,000 pounds sterling (or Sterling equivalent of 22,000 euros, whichever is greater) or 90 per cent of qualifying deposits.

Guernsey – Currently no depositor protection.

Jersey – Currently no depositor protection.

Offshore subsidiaries of British banks are covered by the jurisdictions’ rules, not the UK ones.