What has Europe ever done for us? It's a question that's as common among readers of Investors Chronicle as it is among readers of The Sun. But for once, there's a positive answer: new European legislation will raise the coverage limit on UK savings deposits to the sterling equivalent of €100,000.
At current exchange rates, that's £86,659, although the exact conversion has yet to be done - and once finalised, it cannot be altered later on. Even at current feeble exchange rates, the new threshold is a big improvement on the £50,000 currently insured by the Financial Services Compensation Scheme (FSCS). The new level will take effect in January 2011 and will be a relief to those who feared it may be cut by a government looking to make savings and boost its stock with credit-rating agencies.
Under the new legislation, the FSCS will also be required to pay out compensation more quickly - returning savers' cash within a week of the bank or savings institutions being declared in default.
Good news and bad news
The importance of the FSCS and the compensation cover it offers savers and investors was illustrated last week, when customers of Keydata who held investments backed by Lifemark SA, received the good news that the body would be able to compensate eligible claimants.
The organisation found that the marketing materials produced by the structured product provider did not comply with Financial Service Authority's (FSA) rules, meaning Keydata may owe a legal liability to investors. Investors invested in the following Keydata products: Defined Income Plan issues 1-8, the Income Plan issues 1-14, the Secure Income Bond issue 4 and the Secure Income Plan 1-14, could be eligible for compensation. Full details of all the affected products are available at the administrator, PriceWaterhouseCooper’s (PWC) website at http://www.pwc.co.uk/eng/issues/keydata_investment_services_limited_in_administration.html.The FSCS will be sending out compensation application forms to investors in October.
Not everyone, however, has been so lucky. Last week Thursday, only two few days after the Keydata announcement, the FSCS announced that investors who were sold Lehman Brothers-backed structured products by NDF, Defined Returns Limited and Arc Capital & Income, were not entitled to compensation.
In this case, the FSCS found that investors who bought 'capital-at-risk' structured products had been "adequately warned about the risk of a counterparty default" in the marketing material supplied by the three structured product providers. All three providers went into administration in October last year after they were unable to meet the cost of complaints from investors in Lehman-backed investment plans.
|The FSCS is the compensation fund of last resort for customers of FSA-authorised financial services firms. The FSCS protects the following:|
• Banks and building society deposits
• Credit unions
• Home finance (including mortgage advice)
For more details, see the FSCS website at www.fscs.org.uk. Note that financial services firms who aren't authorised by the FSA are not covered by the FSCS - one reason why you should never buy shares or other products from a non-regulated firm.
Covering your back
Even with the revised threshold, if you are putting your cash into a bank, or other financial institution, there are a few important factors to bear in mind with regards to compensation cover:
■ Remember that should things go belly-up, you will only receive protection on the net value of your savings with that institution. So if you have a mortgage or overdraft with the same bank, the debt will be deducted from the value of your savings in order to determine your compensation.
■ Protection is offered per banking institution, not per account. This means the compensation coverage limit depends on the banking licence. This can get quite complex given that many banks trade under multiple fascias. For example, Halifax, Birmingham Midshires and Bank of Scotland as part of the HBOS group currently share the £50,000 compensation limit. But Royal Bank of Scotland, Ulster Bank and NatWest, all sister banks and part of the RBS conglomerate, each have separate £50,000 compensation limits.
■ At the end of 2008, when the credit crisis was at its peak, and a number of building societies were merging. At the time the FSA allowed separate compensation cover for customers with deposits in two merging building societies. So, for example, if you had accounts at Nationwide and Cheshire Building Societies, between your accounts, you would have a total potential coverage of up to £100,000 (up to £50,000 coverage for each society you banked with). This provision will come to an end on 30 December 2010.
■ Not all UK banks are UK-regulated. But ING Direct and Triodos are covered by the same €100,000 guarantee courtesy of the Netherlands government, while Anglo-Irish savers are covered by the Irish government.
■ Traditionally, the Post Office has offered savers 100 per cent coverage of savings, as its accounts are run by the Bank of Ireland, and the Irish government has guaranteed all deposits held by Irish banks in full. However, you should note that the bank has started a process of transferring its business to a new UK subsidiary, Bank of Ireland UK, which will be regulated by the FSA. So the Irish guarantee only covers you until 1 November; thereafter, you'll be covered for £50,000 under the FSCS scheme until the end of this year, and by the new European regime from January. The £50,000 FSCS limit will apply to the total of all balances you hold in Post Office savings products provided by Bank of Ireland, plus Post Office Cash Isas and any products provided directly by Bank of Ireland. In addition to the FSCS, any account balances over £50,000 held in an "on demand" deposit account will continue to be fully guaranteed under the Irish Government scheme until 31 December 2010. This applies to the following accounts: Instant Saver, Reward Saver, Easy Saver, Variable Rate Cash Isa.
WHAT DO YOU THINK?
We were deluged with questions about investor protection in the aftermath of the credit crunch. Do these rule changes go far enough? Should banks be more open about individual versus collective guarantees? Leave your views below...