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Compensation schemes

Martyn Hocking (editor, Which? Money)
10/11/2008

ARE you worried your nest egg could be vulnerable to a bank collapse? Here's how the compensation schemes work.

The banking crisis has left me wary about the safety of my savings. If a bank or building society fails, am I entitled to compensation?

If your bank or building society fails and is not able to repay the deposits it owes its members, the Financial Services Compensation Scheme (FSCS) will step in.

The FSCS will pay compensation for 100 per cent of the first £50,000 of any deposits.

It's therefore advisable to spread your savings across various accounts and not to invest more than £50,000 in any one account.

Does the FSCS cover my bank or building society?

The FSCS covers firms that are authorised by the Financial Services Authority (FSA). A list of these can be found on the FSA register (www.fsa.gov.uk/register).

If a UK bank is not listed, it is likely to fall under a group authorisation. For more information call 0845 606 1234.

My partner and I have savings in a joint account. Will the FSCS cover us?

The compensation limit will cover each saver's total deposits in an organisation, regardless of the number of accounts they have, or whether they are a single or joint account holder. This means each account holder is eligible to receive up to the full amount in compensation and you can safely keep up to £100,000 in a joint account.

What if I hold several accounts with banks that are subsidiaries of a larger group?

If each bank is separately authorised by the FSA, the compensation limit will apply per person, per authorised institution. If the banks are covered by the parent company's authorisation only, the FSCS will pay £50,000 per person, irrespective of how many institutions you have accounts with.

What happens if I owe money to a bank or building society that fails?

The FSCS will take into account any amounts owed to the failed institution before any compensation is paid. If you've borrowed and saved with the same bank, the FSCS will `set off' the amount you have borrowed against your savings. With building societies, the FSCS may be able to pay out compensation, as a `set-off' arrangement on insolvency is not automatic.

Many foreign banks are still offering attractive rates on savings accounts. Are these banks covered by the FSCS?

Banks established outside the European Economic Area (EEA), must be authorised by the FSA before they can operate in the UK. If these banks failed, your savings would be covered by the FSCS.Banks that operate in the UK but were established inside the EEA would fall under their home regulator's compensation scheme.

In most cases, these schemes pay out less than £50,000. However, the banks can apply to the FSCS for a `top-up'.