BY ALEXANDRA MORGAN
With the Greeks struggling to access their cash, and the protection provided for UK-based deposits about to be cut, savers could be forgiven for wondering how safe their money is. The answer is that it depends on how much they have and where they put it.
More than half of all account holders believe the UK’s high street banks have a bad reputation, but they would still trust them ahead of their smaller and newer rivals.
In the survey by Moneysupermarket.com, 53 per cent of respondents said the traditional providers had a poor image, while only 27 per cent felt the same about the supermarket banks.
Yet the big banks were still seen as the most trustworthy place to save, with Barclays, NatWest and Santander scoring highest, ahead of challengers such as Marks & Spencer and Virgin Money.
Kevin Mountford, Moneysupermarket’s head of banking, said: “The traditional players still have the monopoly on the banking scene when it comes to consumer trust, with many people perhaps naturally cautious about the expertise and capability of new entrants.”
However, he added: “Scandals such as mis-selling investigations and IT crashes evidently remain in the public’s mind, as both RBS and the Co-operative Bank came out as less trustworthy in comparison to the other banking giants.”
In fact, while their reputations – and the interest rates they offer – may vary, the UK’s old-style and challenger providers offer an equally safe home for savings.
All banks, building societies and credit unions licensed by the Prudential Regulation Authority come under the Financial Services Compensation Scheme. The only exception is NS&I, whose Treasury backing enables it to provide its own 100 per cent deposit guarantee.
If any regulated company goes bust, the scheme, which also covers insurance, pension and other financial service providers, will reimburse its customers. Since it was set up in 2001, the FSCS has repaid more than £26billion to over 4.5 million people.
However, the maximum savings compensation is £85,000 per person per organisation – £170,000 for joint accounts – and this limit, which was set in December 2010, is about to fall.
Under the European Deposit Guarantee Schemes Directive, it must be adjusted every five years to the equivalent of 100,000 euros. This means that from 1 January, the ceiling will be cut to £75,000 for individuals and £150,000 for joint holdings.
Andrew Tyrie MP, who chairs the Commons’ Treasury Committee, said: “It is absurd that the 16 per cent depreciation of the euro largely brought about by the crisis in the Eurozone in general, and the Greek crisis in particular, should be forcing a reduction in the level of protection available to UK depositors.”
He added: “Many savers and small businesses arrange their finances on the reasonable assumption that the deposit cover will be stable. They might also reasonably have expected that any changes would be in an upward direction, to reflect inflation and growth. Many people will now have to re-examine the arrangements they have in place.”
To be on the safe side, those with more than £75,000 in a single institution should spread it between providers before the end of the year. However, since the guarantee applies to each licensed banking group, rather than the banks or building societies within it, this needs to be done with care.
For example, Bank of Scotland, Halifax and Lloyds are licensed as part of Lloyds Banking Group. This means someone with £100,000 divided between them would lose £25,000 in the highly unlikely event that they all failed after 1 January.
Royal Bank and NatWest count as a single institution for the same reason, as do Clydesdale and Yorkshire banks. Co-op Bank and Smile are also classed together, while First Direct is part of HSBC.
Anyone contractually tied into products with balances above £75,000 will be allowed to withdraw funds between the old and new limits without penalty from 1 August to 31 December, to ensure they aren’t trapped with a decrease in protection.
Also, from this month, those with a temporarily high balance will receive additional protection. They are now covered up to £1m for six months, to ensure cash from house sales, divorces and inheritances is safe until it can be spread out.
The FSCS also applies to overseas-based savings providers that hold a UK banking licence, these include State and Union banks of India, Bank of Cyprus and Danske Bank.
If you save with a foreign provider, visit https://protected.fscs.org.uk to find out if it is included. If it isn’t, be sure to check the compensation limits that apply in its home country.
Banks based in the European Economic Area are tied to the Deposit Guarantee Schemes Directive, which means they must repay losses up to 100,000 euros in full.
These include Dutch ethical bank Triodos, which has been attracting deposits from savers unhappy with traditional providers; RCI, owned by French car maker Renault; and Sweden’s Handelsbanken, all of which offer accounts here.
Many challenger banks pay higher interest rates than older players. However, there are fears that an 8 per cent profits surcharge being applied to British banks from January, to replace a levy from which the challengers were exempt, could make home-based newcomers less competitive.
British Bankers’ Association chief executive Anthony Browne said: “We believe these moves will undermine competition in the industry by making it harder for smaller players to break through and challenge larger banks.”
As always, the solution will be to keep a close eye on the rate you are receiving and be prepared to go elsewhere if it becomes uncompetitive.
CASE STUDY
Malcolm Bruce was so disillusioned with the investment policies of the big UK banks that when he retired, he decided to deposit his pension lump sum with an ethical provider.
The lack of British-based options led the former education officer to Dutch bank Triodos and he now has several accounts with it, including a tax-free Isa.
Mr Bruce who lives in Edinburgh, said: “I’d love to see an indigenous Scottish ethical bank and I’m sure other people would jump at that too.
"Triodos invests in some really worthwhile causes and I’m very pleased to be part of that.”
He isn’t worried that Triodos is covered by Dutch rather than British compensation rules, as the basic limits will be the same from January.
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