As of 31 December 2015, there’s a chance that a substantial chunk of your savings will no longer be safe in the bank. That’s due to new changes to the Financial Services Compensation Scheme (FSCS) – the UK’s compensation fund which pays out to customers if their bank goes under. Here we’ll outline what’s new, and what these changes mean for your money.
What is changing?
In short, the UK’s deposit protection limit is set to be decreased from £85,000 to £75,000. This means that if your bank, building society or credit union fails, the FSCS will cover any losses suffered up to a maximum of £75,000 per depositor.
The Prudential Regulation Authority is required to review the deposit protection limit every five years, although it intervened periodically throughout the financial crisis. In October 2007, it extended its policy to protect the first £35,000 per bank customer. The following year – at the height of the financial crisis – it increased this total to £50,000. And in January 2011, it rose again to the current total of £85,000.
If you hold a joint account with your partner, you will be entitled to £75,000 each. So, from next year, joint deposits of up to £150,000 will be protected if your bank falls into difficulties.
One final change is that savers with temporarily high balances – usually due to selling or buying a home – will now be covered up to a limit of £1m.
Why are the changes being made?
It’s all linked to the strength of the euro, which – as we well know – has seen better days. The level of protection offered to savers is set in line with a European scheme, which protects savers’ deposits up to €100,000. Member states need to covert that limit into their national currency, using exchange rates prevailing on 3 July.
Compared to most currencies, sterling has enjoyed a particularly strong 2015 so far – particularly in light of uncertainty sparked by the prospect of a potential Grexit.
Will your money still be protected?
Yes. Well, up to £75,000 of it. Under the new system, 95% of retail depositors will be fully protected. That’s a slight decrease on the 98% covered by the £85,000 deposit protection limit. But if you have more than that sum held with any one bank, building society or credit union, you’ll probably want to consider diversifying your approach.
Another thing to keep in mind is that some banks share a banking licence. For example, the Bank of Ireland falls under the same umbrella as the Post Office. Halifax shares a licence with Bank of Scotland, while HSBC shares with First Direct. If you hold more than £75,000 in one group, your money may not be covered. (See a list of the main shared licences at the FSA website).
Do remember that the changes don’t take effect until 31 December 2015. You’ll have until then to ensure that your finances are in order.