It was announced last week that the level of deposit protection under the Financial Services Compensation Scheme (FSCS) is to be cut to £75,000 from January, but what does it mean for ordinary savers? We find out…
The Financial Services Compensation Scheme is a form of guarantee that can be called upon should a bank or building society go bust. Under the current scheme, up to £85,000 per person is covered for each banking licence (£175,00 for joint accounts), which essentially means that you can keep up to £85,000 in a savings account and you'll get it back as compensation should the bank fail.
However, it's important to remember that the compensation limit doesn't apply to each account you hold – it's all about who you hold it with. Some banks share a licence as they're part of the same banking group, so if you've got savings split between Bank of Scotland and BM Savings, for example, you'll need to make sure that the total doesn't add up to more than £85,000 (find out more here).
In a nutshell, it's because they have to. The Prudential Regulation Authority (PRA), the body that sets the rate, has its own set of obligations under the European Deposit Guarantee Schemes Directive – namely, it has to recalculate the compensation limit every five years, and has to set it at the sterling equivalent of €100,000. The current limit met that requirement when it was set in December 2010, but the rate for the next five years was set according to exchange rates on 3 July, and came in at £75,000.
The lower limit would have come into force immediately, but the Treasury has put in place legislation to maintain the existing limit for six months to ensure consumers have time to adapt. "This transitional measure helps to ensure that depositors have suitable time to plan for and adjust to the change and will protect most depositors from experiencing a sudden change in the amount of compensation available in the event of the failure of a bank, building society or credit union," it said in a statement.
Yes, up to the specified amount – the FSCS said that more than 95% of consumers will still be protected under the lower limit, but if you're one of the 5% with more than £75,000 held within the same banking group, it's time to take action.
You'll need to start planning a transfer as soon as possible, as although you've got six months to prepare, what's the point in hanging around? Check out our savings best buys to find a new account that could meet your needs, and as long as you make sure it's with a different banking group to the rest of your savings, you can be confident that you'll be fully protected no matter what.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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