Can you bank on the FSCS?

You thought your savings were protected by the FSCS. Now you've discovered that's no longer the case. Here's why you shouldn't panic...

When it comes to choosing a savings account, safety is a pretty important factor these days. We want to be sure that our money would be safe if a bank collapsed.

And when you're deciding where to put your savings, you may focus on the UK's Financial Services Compensation Scheme (FSCS). Under this scheme, the UK government has promised to protect up to £50,000 of your savings if your bank defaults.

The only problem is that not all bank accounts are fully covered by the FSCS. What's worse, some banks used to be covered by the FSCS but aren't now. So you might have opened a particular account because it was FSCS protected, only to find that the situation had changed later on. This has happened recently to savers with the Post Office and Anglo Irish bank.

Deposit protection

By law, most financial services firms must be authorised by the FSA in order to operate in the UK. As part of that, these firms (and therefore your savings) are protected by the FSCS.

However, if your savings are with a foreign bank which is a member of the European Economic Area, your savings may be protected in part by a foreign scheme as well. So if the bank failed, you will be expected to try to claim from the foreign compensation scheme before going to the FSCS.

I say in part, because if the level of compensation provided by the EEA bank is less than that of the UK's (less than £50,000), your bank can opt to top up the compensation level to the full £50,000 by joining the FSCS.

So say for example, you had money saved in Bank XYZ of Cyprus and the bank collapses. Under the Central Bank of Cyprus Deposit Protection Scheme, you can currently claim 90% of your deposit up to €20,000. But if you had more than €20,000 invested with the bank, you could claim the remainder of your deposit up to £50,000 from the UK's FSCS.

Currently, all member states of the EEA must provide a minimum compensation level of €20,000. However, as of 30 June, this level is increasing to €50,000.

What if the foreign bank's compensation is better than the UK's?

Under European law, if your bank is part of the EEA and offers a higher level of protection than that of the UK's, it won't need a top up from the FSCS. Therefore, it cannot remain a member of the FSCS. And that means you'll only be able to claim through the foreign scheme.

This is exactly what has recently happened to anyone with savings with the Post Office. Post Office savings accounts are provided by the Bank of Ireland.

Last September, the Irish government announced it would guarantee all deposits, without limitation, held by six named Irish credit institutions -- including Anglo Irish and Bank of Ireland (and therefore Post Office accounts).

Given that this far outweighs what the UK government is offering as protection, this means any savings in Irish owned banks are no longer protected by the FSCS. Instead, they're protected by the Irish deposit protection scheme.

The Dutch scheme is fairly similar, only this time the Dutch government has guaranteed to protect all deposits up to €100,000. So anyone with savings in ING will be solely compensated by the Dutch government and not the FSCS.

The table below shows which institutions are now solely covered by their home-state deposit protection scheme:

Is this fair?

The news that Post Office savings will no longer be covered by the FSCS has caused a lot of distress to many. Understandably, if you've chosen your savings account primarily because you're confident about the protection the FSCS provides, you're likely to feel rather disgruntled if you later find out this is no longer the case.

Part of the problem is that many savers are concerned that the Irish economy is at greater risk than the UK's. And if you believe your money is at greater risk, you may want to move it elsewhere.

But if you've locked away your funds in a fixed rate bond for a year or two, you won't be able to withdraw it until the bond matures (unless you're prepared to pay a penalty).

So it has been argued that the FSA should maintain responsibility for those savings until the bond matures in case the foreign scheme can't pay out for some reason.

But while I can understand this point of view, it's important to remember that it's European law that dictates how are savings are protected -- not the FSA. And even though your savings are no longer protected by the FSCS, they are still protected.

That said, perhaps it would make sense to allow concerned savers to access their funds and move them elsewhere without paying a penalty.

Some reassurance

If you do have money in an Irish bank such as Anglo Irish or the Post Office, I want to offer some reassurance. As I said earlier, your funds are still protected under the Irish deposit protection scheme which, in some ways, offers a better deal than the FSCS. After all, your deposit is protected in full, not just the first £50,000.

What's more, while I can't guarantee anything in these uncertain times, a default by Ireland still seems unlikely. So I do think savings on the emerald isle are fairly safe. And even if something did go wrong, it's pretty certain that Alistair Darling would step in and guarantee UK savers' deposits in Irish banks, just as he did with UK savers in the Icelandic banks. (Although he hasn't helped savers in offshore accounts.)

I also think the same could be said for Dutch banks such as ING.

That said, if you are still losing sleep about any of this, you're probably better off withdrawing your funds and moving them elsewhere, even if this means paying a penalty.

Non EEA banks

Given that one of the best fixed rate bond accounts currently comes from Indian bank ICICI -- its HiSave Fixed Rate Account offers 3.9% AER for one year -- there's a good chance you'll have money invested in the bank. But ICICI obviously isn't part of the EEA. So what does that mean?

It's very simple. Your savings are still protected by the FSCS which means you're guaranteed up to £50,000. And that's very unlikely to change. After all, ICICI can't simply decide to pull out of the FSCS -- if it did, it wouldn't be operating in the UK anymore.

To find out more about the safety of individual banks, you can read this article.

Knowing how safe your money is clearly a big concern to many of us. And I can't give any 100% guarantees.

That said, if you find that your savings account is no longer protected by the FSCS, it doesn't mean that you're not going to be protected. I really don't think there's any need to panic.

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