For peace of mind you should establish what investor protection you have with each of your banks, and how it works, says Jason Porter, director of expat financial advisers Blevins Franks. The same applies for capital you have held in other financial institutions like investment firms, insurance companies etc in the event of institutional failure.
So, what protection do banks offer?
Under an EU directive, each EU country provides a bank deposit guarantee of €100,000. In the event a bank fails, your national deposit guarantee will refund your savings, up to the limit of €100,000.
Savings above the €100,000 could be lost if your bank fails. You may receive additional funds following any distribution of asserts as part of the insolvency process, but this would depend on the bank’s situation at the time.
Deposits are covered per depositor, so couples with joint accounts have €200,000 protected. Note that the guarantee is per banking group, not per bank account or even per bank – some banks with different names form part of the same banking group, so you need to be careful.
In the UK, accounts are protected by the Financial Services Compensation Scheme. The limit is currently £75,000 (to match Europe’s €100,000, with the amount set in 2015).
As in Europe, protection is per depositor (so accounts in joint names are protected up to £150,000), and per banking institution. An institution is not the same as a bank. Halifax and Bank of Scotland, for example, are part of the same institution.
The length of time each claim takes to process depends on a number of factors, some of which are entirely outside the FSCS’s control, but it will aim to pay compensation within seven days of a bank, building society or credit union failing. Any remaining claims, which are likely to be more complex, will be paid within 20 working days.
Since July 2015, the FSCS provides a £1 million protection limit for temporary high balances.
UK Offshore Centres
Banks in the Channel Islands and Isle of Man are not covered by the UK scheme, even if they are divisions of UK banks. Instead you would need to rely on their local guarantee schemes, which offer lower levels of protection.
The Isle of Man provides compensation of up to £50,000 for covered banks. If a bank fails a fund will be created to pay compensation to depositors. The maximum fund will be £200 million. There is no guarantee of when you will receive your compensation.
The limit in Jersey and Guernsey is also £50,000, capped at £100 million in any five year period. An interim payment of up to £5,000 will be made within seven working days and the balance of compensation paid within three months.
Many savers with larger cash deposits have spread them out over more than one bank. It results in more paperwork, but is worth it.
Others have opted to move capital into arrangements which provide a higher level of investor protection than banks can offer. For example, if you have an investment bond issued by a Luxembourg-regulated insurance company, your investment assets are protected should the insurance company fail.
Luxembourg provides very robust protection for life assurance policyholders. The cornerstone of its investor protection regime is the legal requirement that all clients’ assets must be held by an independent custodian bank approved by the state regulator. The bank is required to ring-fence clients’ securities (investment funds, shares, bonds etc) so that they are off its balance sheet. If the bank fails, these securities remain in segregated client accounts. 100% of the policy holder’s securities are therefore protected. This does not include cash deposits, but cash held in monetary funds are treated as securities and so are protected.
In any case, you should always ensure you have adequate diversification across different investment assets, says Jason Porter. This reduces risk as well as increasing the potential for improved returns.