December 6 2013 Latest news:
Adam Aiken, Editor
Monday, September 17, 2012
If you have substantial savings, you should know which banking licence your money comes under.
People who hold money with both Northern Rock and Virgin Money have been told they would be entitled to the same levels of compensation if the institutions went under.
The two brands will maintain separate licences when the sale of Northern Rock to Virgin goes through next year. It means all customers are protected for up to £85,000 in both banks (£170,000 in total).
However, all customers of the enlarged Yorkshire Building Society – which now includes the Norwich and Peterborough, Chelsea and Barnsley brands, as well as Egg savings – are protected under a single licence.
That means consumers who collectively hold more than £85,000 in Egg and N&P accounts, for example, should consider moving some of their money elsewhere.
Which bank owns which brands is not simply an exercise in red tape – it is also crucial to customers who could be affected in the event that a financial institution collapses.
Under the Financial Services Compensation Scheme (FSCS), consumers have their savings protected up to a certain level, but the payouts can depend on which FSCS licence an institution operates under.
The past few years have seen a number of tie-ups on the high street. The biggest of these have included Lloyds TSB and HBOS merging to form Lloyds Banking Group, and Santander merging Abbey with Alliance & Leicester and part of Bradford & Bingley.
More recently, Yorkshire Building Society has merged with Norwich and Peterborough Building Society and taken over the savings book of Egg, while Virgin Money is in the process of buying Northern Rock.
Under the FSCS, all customers have their first £85,000 of savings protected per institution (£170,000 for accounts held in joint names). That means that as long as you don’t breach the £85,000 limit, you will get your money back if the bank or building society fails.
But it is not always obvious which institutions operate under which licence. For example, Royal Bank of Scotland and Natwest are part of the same group, but they operate under separate licences, so you could have £85,000 in each bank and you would be fully protected.
But the Co-op Bank and Britannia operate under a single licence, which means you are protected only up to £85,000 for any savings you have anywhere in those two banks.
For most people, the £85,000 limit is sufficient. But there will be some customers – perhaps those who are between homes – who do have large cash sums sitting in deposit accounts, and those people would do well to split their savings across different banks if necessary.
Although it is unlikely that one of the large high-street players will go bust, it has happened. The FSCS has paid out £24bn since it was set up in 2001, with the bulk of that paid to bank customers in 2008.
Savers at the failed Bradford & Bingley received £15bn and £4.5bn went to Icesave customers. Other bank failures in 2008 that resulted in the FSCS stepping in were Kaupthing Singer & Friedlander, Heritable Bank and London Scottish.
The FSCS has also paid out on behalf of failed IFAs, credit unions and insurers.
“The worrying issue is that some consumers are still not aware that the limit doesn’t apply to each individual brand name, but only per regulated provider,” said Andrew Hagger, an analyst at Moneynet.co.uk
“It would be far simpler all round if each brand was forced to provide the £85,000 limit to its customers, and it would eradicate the confusion that’s been rife in this area for years.
“If the government is serious about encouraging and protecting savers in the UK then this is exactly the sort of anomaly it should be looking to stamp out.
“When Icesave collapsed in October 2008, there was a massive amount of interest in the FSCS limits and whether people were covered or not, but three years on people have started to forget about the consequences of bank failures and are once again more focused on chasing the best rates.
“The only UK institution where you can get a higher protection limit is with National Savings & Investments, which is backed by the Treasury and where all your savings will be 100pc secure, regardless of the size of your balance.
“In December 2010, when the new £85,000 limit was introduced, the FSA stated that if a bank collapsed in the future, the FSCS would pay the majority of depositors within seven days and the remainder within three weeks.
“Importantly, it also said that savings balances would be ringfenced and any outstanding loans or overdrafts would not be deducted from your savings if held with the same provider.”
Aside from the FSCS, non-UK banks that are in the European Economic Area can opt for a different type of protection, known as the Passport scheme.
It means you would claim from the equivalent of the FSCS in the bank’s home country, so you would be relying on the financial capability of a foreign government.
Banks operating in the Passport scheme include Bank of Cyprus UK, ING Direct, Triodos Bank and Anglo Irish Bank.