Since the drama at Northern Rock last summer, British savers have felt understandably nervy about the security of their savings. Now chancellor Alistair Darling is trying to curb those fears by improving the UK’s deposit protection scheme.
The first big change is to extend the Financial Services Compensation Scheme to cover the first £50,000 of your cash, rather than £35,000. His other aim is to cap the time taken for the scheme to pay out at one week. That’s all well and good, although quite how such a short deadline will work for a large bank facing thousands of claims is unclear.
The new rules, assuming they pass through the consultation process, look likely to come into force next February. So who will pay for the enlarged scheme? There’s the rub. Under current proposals the scheme will not be “pre-funded” – banks are refusing to stump up capital right now, just as they are struggling to raise it. Instead, it seems the FCSC will be able to borrow “short-term” from the National Loans Fund to meet claims. In other words, if a bank goes bust, the taxpayer will bail out its depositors. The government will then claw this money back by selling the bank’s assets, and imposing a levy on other banks.
But that could take time. As David Wighton in The Times points out, “the snag… is that a bank failure is likely to come at a time when the entire banking system is under stress. This is precisely the wrong moment to ask banks for money or to sell bank assets”. So the scheme may well provide a touch more reassurance for savers with more than £35,000 in the bank. But it merely underlines the fact that as with Northern Rock, it’s the taxpayer who ends up on the hook for UK banking busts, rather than the banking industry.
One thing’s for sure – regardless of how much you have in the bank, it would still be a huge pain to have your cash caught up in a bank run. So it’s worth having accounts with more than one provider. But bear in mind that the current FSCS scheme works on the basis of one claim per person per bank. So if you have separate accounts with a bank that owns and runs several brands that all share a single FSA registration, you are only entitled to one claim. You can check which organisations this affects here.
Then there’s “netting”. Currently anyone who has a deposit of say £30,000 and a mortgage of £100,000 with the same bank, would find, were it to fail, that they are treated as owing a net £70,000. This means no FSCS claim to recover the £30,000 of savings, a headache if you originally set up the deposit as an easy-access rainy-day fund. That’s why it’s worth considering having your savings and your mortgage at different banks if you need guaranteed access to your cash.