When you have worked hard to build up your savings, it is important to understand what level of protection you will receive in the event the financial institution is unable to repay you your money.
For peace of mind you should establish what investor protection you have with each of your banks, and how it works. The same applies for capital you hold in other financial institutions like investment firms, insurance companies etc in the event of institutional failure.
So, what protection do banks offer?
Under an EU directive, each EU country provides a bank deposit guarantee of €100,000. In the event a bank fails, your national deposit guarantee scheme (Fondo de Garantía de Depósitos (FGD) in Spain) will refund your savings, up to the €100,000 limit.
Savings above the €100,000 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.
Compensation is per depositor, so couples with joint accounts have €200,000 protected. Note that the guarantee is per banking group, not per bank account or even per bank – some banks with different names form part of the same banking group, so you need to be careful.
Under certain circumstances, you may be eligible for higher protection for temporary high balances.
In the UK, accounts in regulated banks are protected by the Financial Services Compensation Scheme (FSCS). The amount protected should be the same as offered in the EU and is currently £85,000.
As in Europe, protection is per depositor (so accounts in joint names are protected up to £170,000), and per banking institution. An institution is not the same as a bank. Halifax and Bank of Scotland, for example, are part of the same institution.
The length of time each claim takes to process depends on a number of factors, some of which are entirely outside the FSCS’s control, but it will aim to pay compensation within seven days of a bank, building society or credit union failing. Any remaining claims, which are likely to be more complex, will be paid within 20 working days.
The FSCS also provides a £1 million protection limit for temporary high balances.
UK offshore centres
Banks in the Channel Islands and Isle of Man are not covered by the UK scheme, even if they are divisions of UK banks. Instead you would need to rely on their local guarantee schemes, which offer lower levels of protection.
The Isle of Man’s Depositors’ Compensation Scheme (DCS) provides compensation of up to £50,000 for covered banks. There is no time limit for the payment of compensation. The amount of compensation paid and the timing of payments will depend upon the size, asset quality and profile) of the bank which fails, and the amount of funding contributed. There is no standing fund for the DCS. It is funded if and when required by contributions from covered banks which participate in the DCS and the Isle of Man Treasury, capped at £200,000 for a 10-year period.
The limit of Jersey and Guernsey’s depositors’ compensation schemes is also £50,000, capped at £100 million in any five-year period. They aim to pay compensation within three months of a bank failure.
Many savers with larger cash deposits have spread them out over more than one bank. It results in more paperwork, but is worth it.
Others have opted to move capital into arrangements which provide a higher level of investor protection than banks can offer. For example, if you have an investment bond issued by a Luxembourg regulated insurance company, your investment assets are protected should the insurance company fail.
Luxembourg provides very robust protection for life assurance policy holders. The cornerstone of its investor protection regime is the legal requirement that all clients’ assets must be held by an independent custodian bank approved by the state regulator. The bank is required to ring-fence clients’ securities (investment funds, shares, bonds etc) so that they are off its balance sheet. If the bank fails, these securities remain in segregated client accounts. 100% of the policy holder’s securities are therefore protected. This does not include cash deposits, but cash held in monetary funds are treated as securities and so are protected.)
In any case, you should always ensure you have adequate diversification across different investment assets. This reduces risk as well as increasing the potential for improved returns.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 1st of August, 2019.