Monday 22nd September 2008
by Bob Bardsley
Know Your Money Editor
With the collapse of Lehman Brothers in the US and headlines in the UK reporting the acquisition by Lloyds TSB of the Halifax Bank of Scotland (HBOS) financial services group, many consumers might feel there is a question mark hanging over their own funds. So how safe are savings? And what are some of the potential pitfalls that could see an account go unprotected where it may otherwise be subject to compensation?
In fact, the UK's financial services industry as a whole has a number of different protections in place - such as the need for banks to hold enough money in their own reserves to pay out the total balance of all their customers' accounts - to ensure that accountholders can retrieve their funds should they wish to. But when an institution goes bankrupt, who pays out to cover the money lost by customers? It may seem as though the answer would be "nobody", but that is not quite true - there is compensation available, albeit subject to certain limitations...
FSCS
The Financial Services Compensation Scheme (FSCS) exists to protect deposits should a bank or other organisation regulated by the Financial Services Authority (FSA) fail. It guarantees to repay up to £35,000 of funds held with the relevant provider which may otherwise have been lost. However, it may be worth noting the limitations of the scheme. These include the fact that the £35,000 limit is applied per customer, not per account - so if your current account and savings account are with the same bank, no more than £35,000 in total is required to be paid out by the scheme.
As a result of this, much of the advice given relating to the FSCS recommends distributing funds between different services providers. This might mean having a current account into which your salary is paid, a savings account with a different bank to keep money for easy access and an individual savings account (ISA) elsewhere for funds that you are unlikely to need in the short term but want to earn a high level of interest on. Of course, not everyone will have more than £35,000 sitting in their account, so the issue of exceeding the maximum threshold under the FSCS might never arise.
What about mergers?
The recent announcement of the acquisition of HBOS by Lloyds TSB has potential implications on those who have distributed their funds in the manner described above. Imagine, for instance, having a savings account with Lloyds TSB which contains £25,000 and a similar amount in an ISA at Halifax. In all, that's £15,000 more than the £35,000 FSCS threshold - but is the money safe as the two banks are separate? Or does it become treated as a lump sum should they combine?
Parliament has been debating that very topic recently as the Treasury select committee considered how likely it is that consumers will even be aware of the dangers posed to their finances by paying it into accounts with different brands of the same banking group. Under the current regulations, if each brand is covered by a separate FSA authorisation, the FSCS should pay out for £35,000 of funds held with each provider. If the different brands are trading names of the same FSA-authorised provider, all funds held by an individual are treated as a lump sum.
In the case of Lloyds TSB, the initial announcement of the acquisition referred to "a portfolio of strong and trusted brands" which constitute the HBOS group. These include Bank of Scotland, Halifax, Scottish Widows and Cheltenham & Gloucester. Anyone whose funds are held with those institutions might want to keep an eye on the acquisition process to see how the resultant organisation is authorised by the FSA.
So what do I do?
Parliament is calling on the FSA to remove some of the burden from accountholders to ensure that they do not need to go to great lengths to discover whether the financial services providers they bank with are one or many. Until that day, the FSCS may be seen as a relatively secure level of protection for funds up to £35,000. Beyond that level, the government's own investments might be one area to consider due to the guarantees put in place by National Savings & Investment.
The Treasury-backed investment body asserts that it offers "100 per cent" security for deposits due to the unique way in which it operates. Products available from National Savings & Investment range from fixed-rate bonds to ISAs, as well as premium bonds. While the latter do not provide interest, they do come with the chance to win a cash prize each month. This might mean a payout of less than that which a conventional savings product would return, but could also mean a lottery-style windfall - with the added bonus that the funds initially invested may also be recouped by selling the bonds back.
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