Last week Bank of England (BoE) governor Andrew Bailey said the central bank was considering increasing the level of cash deposit protection – at least for smaller institutions – after the recent chaos in the US generated concerns about the strength of some smaller banks.
This is not a reason to be unduly worried. Bailey does not believe we face a "systemic banking crisis" because UK banks are "well capitalised, liquid and able to serve their customers and support the economy”. And the existing guarantee level already offers a generous amount of protection. If you hold money with a bank, building society or credit union authorised by the UK Prudential Regulation Authority and the Financial Conduct Authority (FCA) and it fails, the Financial Services Compensation Scheme (FSCS) will compensate you by up to £85,000 per institution in which you have money. For joint accounts, this is up to £170,000. The FSCS aims to pay compensation within seven days of a bank or building society failing.
But advisers generally suggest holding about six months’ worth of your expenses in cash. So if, for example, you have a large mortgage and/or high bills because you are a large household, your cash savings could exceed £85,000. And if you are retired and rely on investments for your income, advisers suggest having as much as two years’ worth of your expenses in cash so that you do not have to sell investments when markets are falling. So you might well need to hold cash worth more than the protection limit.
But, for the time being, don't hold more than £85,000 with one company. Savers should also always ensure that the different banks and building societies they hold their money with are not part of the same group sharing a banking licence. This is because the FSCS treats them as one bank, meaning that an £85,000 compensation limit applies to what you hold in these institutions in aggregate. You can see which banks share a licence on the FCA’s register at register.fca.org.uk/ or the BoE's website.
And ensure that the institution is UK regulated at fscs.org.uk/check/check-your-money-is-protected/. You can also see if your bank is authorised on the FCA register, but this includes authorised companies that are not a bank, building society or credit union and are not covered by FSCS protection. Examples include e-money and payment services firms.
The FSCS may also protect protect ‘temporary high balances’ of up to £1mn for six months from when the amount was first deposited, although cannot confirm if it will until the bank or building society in question fails. Eligible reasons for having more than £85,000 in your bank account for a short period can include a property purchase or sale of and equity release from a main residence; benefits payable under an insurance policy; redundancy; marriage; benefits payable on retirement or inheritance.
Cash deposits held on your behalf in client accounts, for example, by self-invested personal pension (Sipp) providers, solicitors, accountants, online deposit aggregator platforms and nominee companies are covered by the FSCS if you are ‘absolutely entitled’ to the funds. If you are not sure of the legal status check your terms and conditions, or contact the company. The FSCS may also take up to three months to pay compensation for deposits held in such accounts.
And make sure that you hold your other cash accounts in different banks to the one in which, for example, your Sipp provider or solicitor is holding your cash if in total they are worth more than £85,000.
