It was the financial crisis of 2008/09 that brought the thorny subject of financial protection – and financial compensation – well and truly to the fore. Ever since, UK banks and building societies have been encouraged to keep reassuring consumers their money is protected by the law.
The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme for customers of authorised financial services companies. Established as an independent body under the Financial Services & Markets Act 2000, the FSCS is free to consumers, being funded by compulsory levies on firms in the financial services sector. The scheme pays compensation to customers if a firm is unable, or likely to become unable, to pay claims against it.
New rules were introduced in August 2012 requiring banks, building societies and credit unions to display “prominent” posters and stickers about the FSCS in their branches, and to provide information on their websites to boost awareness of the protection provided by the FSCS.
Research has shown that people who know about the FSCS feel reassured, and are therefore more likely to feel comfortable when buying financial products, and the FSCS believes that financial services firms that have day-to-day contact with customers are particularly well-placed to publicise the protection the scheme affords.
From 1 January 2016, British savers will receive a lower guarantee on their deposits. At present, in the unlikely event that a UK bank or building society collapses, the Financial Services Compensation Scheme (FSCS) will pay compensation of up to £85,000 per person or small business, per authorised bank or building society. However, from the beginning of 2016, the maximum amount of compensation will be reduced from £85,000 to £75,000.
Under the European Union’s own Deposit Guarantee Schemes Directive, a harmonised limit of €100,000 (around £73,500) is fixed across all EU member states. Because the value of the pound has increased against the euro, the sterling limit has been reduced to keep it at the harmonised level, and the Prudential Regulation Authority (PRA) is now required to review the limit every five years.
According to the FSCS, most people have £50,000 or less in savings and therefore the new threshold will protect more than 95% of UK savers. However, those who are affected by the new rule need to take action and consider dividing their money between several banks and building societies in order to ensure their savings are fully covered.
However, consumers who have a high balance in the short term – for example, following a house sale or a ‘life event’ such as an inheritance or a divorce settlement – will receive additional protection up to £1m for a maximum of six months, in order to allow the depositor time to spread the money – and hence the risk – across institutions.
FSCS protection has been expanded to include larger companies and small local authorities, such as parish councils, and their cash deposits will be covered up to £75,000. The PRA has also altered the insurance limits for compensation under the FSCS to increase cover for policyholders in the event that their insurer collapses. The changes have increased the limit to 100% of cover for all long-term policies, for professional indemnity insurance and claims arising from death or incapacity although the limits for all other kinds of insurance remain unchanged.
It is important to remember that, if you have several accounts with the same bank or building society, or with different banks or building societies that are subsidiaries of the same institution, you will still only receive the maximum amount per person, per institution.