Is there a problem with the Financial Services Compensation Scheme?

bank of england

As safe as the Bank of England? (photo by den99 CC-BY)

As we have all seen recently, the banking system is unstable. In the event that a bank goes bust and the bank’s liquidators are unable to repay your money, then the government’s Financial Services Compensation Scheme is available as place of last resort. However, there is a potential problem with the scheme which one must be careful about. This problem shows that you must not only spread your risk, but you should conduct research before making any deposits.

Established by the Financial Services and Markets Act 2000, the scheme compensates customers providing the financial institution is an authorised financial services firm. The maximum compensation payable is £50000. The scheme also covers investments, home finance (mortgage advice and arranging).

The catch lies in the authorisation of the institution. A financial institution which carries the relevant authorisation may have several brands or companies listed under the same authorisation. This means that if accounts are held in two or more of these companies, they will all come under the one authorisation. Therefore, £50000 will be the maximum compensation for all of them together.

For instance, suppose you hold accounts with Halifax, Capital Bank and Bank of Scotland, each of which have deposits of £25,000. The authorised company for all three of these is Bank of Scotland plc. If the Bank of Scotland plc goes into liquidation, then the maximum compensation is £50000. You have lost £25000.

Another example would be Nationwide Building Society which is the authorised institution for Nationwide Building Society, Cheshire Building Society, and Derbyshire Building Society.

You should keep an eye on the financial news and keep up-to-date with mergers. The Spanish bank Santander is undergoing rebranding since its purchase of Alliance and Leicester. The authorisation for the latter will soon disappear and be will be under Santander only, thus leaving depositors vulnerable if they have substantial accounts in both companies.

So spread your risk, but do the research beforehand.

Full details on the Financial Services Compensation Scheme website.

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  • Gaylord says:

    Excellent advice. Many thanks!


  • eiffel says:

    When Northern Rock collapsed, the government promptly suspended the £50,000 limit. It seems there’s nothing politicians fear more than the TV news showing a run on a bank. So I guess the same would be likely in the event of a future collapse.

    Anyway, the value of a government guarantee is open to question. When times are good, a government guarantee seems absolutely rock-solid. But when times turn bad, governments can and do default. Alternatively, they can print enough money, Mugabe style, to inflate away the value of everyone’s deposits. Problem solved (for the government, if not for the depositor).

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