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The Financial Services Compensation Scheme

Fifty pound notes: Make sure you’re protected.

The Financial Services Compensation Scheme (FSCS) has increased the protection it gives you on cash savings that you hold in any bank or building society accounts that it covers.

The compensation limit for deposit protection is now £85,000. The limit for joint accounts is £170,000. These limits were raised at the end of January.

The £1m limit for temporarily high balances is unchanged. (See below for more on this).

What is the FSCS?

The FSCS is a statutory compensation scheme for customers of FCA1 and PRA2 authorised firms. The FSCS is funded by levies raised from such firms.

The deposit protection the FSCS offers is one of the significant benefits of cash for private investors. Everyone should know the details.

The FSCS protects deposits with the vast majority of mainstream current and savings accounts that you’re likely to come across, including virtually3 all those available from the major UK banks or their subsidiaries that are authorized by the PRA or the FRA.

Do make sure you’re covered by the FSCS, don’t just assume it. See the PRA’s website for a full list of regulated firms.

Note: Non-cash investments are treated differently. We’ve covered investor compensation in a different article.

What happens if I have more than £85,000 in a failed UK bank?

If you hold cash deposits with a financial institutions in excess of the deposit insurance limit, then you’d become a general creditor of that institution in the event that it fails.

For instance, if you have £200,000 in deposits in a sole account with a failed bank then the last £115,000 is not guaranteed and you wouldn’t be able to recover it via the FSCS.

It’s important to note the FSCS guarantees are on a per institution basis. See below.

What is an FCA Authorised Institution? The FSCS compensation limit does not apply to any particular bank, let alone to multiple accounts you may have with the same bank. Rather, it is applied per FCA registration licence number. This is important because banks you perhaps do not realise have anything to do with each other may be owned and operating under the same licence (e.g. Barclays and The Woolwich) while other banks that you know are connected by ownership may actually operate under distinct licences (e.g. Lloyds Bank and Halifax). See Money.co.uk for a list of the different UK firms and the single licences under which they operate. You can also download a list from the PRA.

Spread your cash between accounts to maximise protection

As we’ve said, the FSCS will compensate you for up to £85,000 on cash deposits held with any ‘authorised institution’ in the event of its failure. (I’m ignoring joint accounts here for reasons of simplicity. You can do the maths for homework!)

The total is calculated by adding up all the money you’ve spread across any of that institution’s subsidiary banking brands registered under the same banking licence.

For instance HSBC and First Direct are registered under the same banking licence. If you had £45,000 with one and £45,000 with the other, then in the event of failure you’d only be compensated for £85,000 of the total £90,000 you’d placed with them.

In contrast £90,000 split across two firms with different banking licenses would be covered in full.

Once you have more than £85,000 in cash savings you should therefore open a new bank account with an entirely different qualifying banking group. By saving new cash there you can ensure all your savings are eligible for compensation in the event of a failure.

Remember to consult that list to ensure your money is appropriately diversified.

Temporarily high limits

The FSCS provides a special £1 million protection limit for temporarily high bank balances held with a bank, building society, or credit union if it fails.

This special limit was introduced a couple of years ago as a result of the European Deposit Guarantee Schemes Directive. It offers people with some types of temporary high balances FSCS protection on up to £1 million for up to six months.

If you’d just sold a house, for instance, you might have a temporarily high balance. The temporary protection stops you having to open numerous different bank accounts just to protect your short-term cash hoard.

  • It’s worth reading the FAQ on the FSCS website if you have a temporary high balance.

Fluctuating deposit protection

So the deposit guarantee limit is £85,000. As I mentioned this was changed on 30 January 2017. Before then the limit was £75,000.

Confused? Buckle up – it gets worse.

You see, the limit has been at £85,000 previously. It then went down to £75,000 and now it has gone back up.

These fluctuations are due to changes in the exchange rate. As the pound has strengthened and then weakened against the euro, the limit was lowered and then raised again.

Some readers might be pleased to learn they can blame Europe for the confusion. Others might blame our vote to Leave. You see, the European Union Deposit Guarantee Schemes Directive fixed a guarantee limit of €100,000 (or the equivalent) across Europe. This means changes in the pound/euro exchange rate makes the UK’s limit more or less attractive, compared with the situation over the Channel.

To address this, the directive requires the UK regulator to review the limit every five years. However it can also move before then if big enough exchange rates shifts warrant it.

And that’s what has happened. Twice. In just a couple of years!

I presume the reason for harmonizing protection is to stop people moving money from one country’s banks to another in a panic.

Such concerns seem finickity in normal times. But the most recent rounds of chaos – the credit crunch of 2008 and the euro crisis of 2012 – should still be fresh enough in our memory for us to see why regulators would seek to curb ‘regulatory arbitrage’ like this.

Nevertheless it is confusing.

At least the FSCS has so far announced the limit changes ahead of time. It does this to give cash fat cats time to move their money around if they need to.

But roughly 95% of people were entirely covered by the lower limit, anyway. Hard as it may be to believe around here, the vast majority of British people have less than £85,000 in savings. (Some 16 million have less than £100.)

Also, the changes are obviously more of an issue when the limit falls than when it rises.

At the new higher £85,000 limit, you’re clearly better protected than before. But when the limit falls – which it could well do again in the next few years – you might suddenly have money at risk of a bank failure. (There’s also been confusion in the past with fixed-term deposits that straddle the change dates.)

Beyond cash

Remember that some other very low-risk assets, specifically UK government bonds, have a different risk profile to cash. They won’t be in any immediate danger should a commercial bank go bust.4

Former fund manager and Monevator contributor Lars Kroijer has written about the safety of your cash in the bank. He believes you should assess the credibility of individual banks, even with the FSCS protections in place. Read his piece for more.

Bottom line: If you’re lucky enough to have a lot of cash, pay attention.

I have a dream: One guarantee limit, never changing

It seems sub-optimal to me to chop and change legislation specifically designed to give people confidence in the banking system.

When the guarantee was lowered, I wrote:

I remember the craziness of the last financial crisis, so I do understand the desire for a harmonized protection scheme.

But who is to say the Euro won’t be stronger in six months anyway? Let alone a year or two?

Well here we are just a couple of years later, and the limit has indeed been raised.

True, for most savers there will be no practical difference – the old limit was sufficiently high to cover their deposits and 98% are covered by the new limit. But they will have read a lot potentially confusing stories. Again, not what you want with this sort of scheme.

Ideally anyone in the street could tell you what the compensation limit is. It wouldn’t change from year to year. Maybe once a decade? That’s the way to instill confidence.

I also don’t see why the general deposit compensation limit should be raised, but not the temporary high limit. Obviously very few people will have temporary high balances at any given time, but the principle that justifies the shifting guarantees should still hold.

It’s all a bit silly really. From the UK state’s point of view, this protection is akin to the deterrent affect of nuclear weapons. It’s there but you don’t ever want to use it.

If the FSCS ever has to start bailing out UK High Street banks, we’d be in serious trouble. The state would probably step in, and all bets are off. (In the last financial crisis the UK government even covered private savers with overseas failed banks that weren’t protected, for instance. Next time it could be more or less generous).

What the FSCS is really there to do is stop bank runs, like we saw with Northern Rock in 2007. The fact that it’s there should mean we don’t ever actually use it, because savers know their money is protected. A deposit guarantee scheme is not something that should ever be used in the normal run of things.

I guess there does have to be some limit to the protection. Without it, oligarchs might move billions to UK banks for rock-solid protection. That would represent a huge liability to the state.

But why not protect all savings up to say £1 million? At that point the limit would be irrelevant for virtually everybody – even the vast majority of those with multiple accounts held under the same banking licence.

£1 million is easy to remember, too!

Perhaps Brexit will deliver some stability, although depending on our terms of exit we may seek equivalence with EU legislation, which would leave us where we are today.

In any event, for now £85,000 per authorized institution it is. To be ultra-safe you should probably diversify your cash savings beyond that between different banks as appropriate.

It’s always safest to assume a failure is possible. Even if it’s very unlikely.

Note: This post has been updated, and some older comments below may refer to the previous FSCS compensation limit. Check the date of the comment if you’re confused!

  1. Financial Conduct Authority []
  2. Prudential Regulation Authority []
  3. As far as I know it’s actually all such accounts, but there may be quirky exceptions so please do double check! []
  4. I say “immediate danger” because in a scenario where UK banks are going bust left and right, investors *may* question the viability of the UK state and such bonds could plummet. Given that we can print our own currency to meet our obligations, however, it’s much more likely that they’d rise in value in a crisis, at least in pound sterling terms. []

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{ 29 comments… add one }
  • 1 Topman July 3, 2015, 4:53 pm

    Where, as in my case, would cash held by a “banking” type of share dealer i.e. iWeb, which is operated by Halifax Share Dealing, fit into all of this?

  • 2 UK Value Investor July 3, 2015, 6:05 pm

    I don’t think this is too bonkers. The amount is only reviewed once every 5 years, so it’s not like it’s going to bounce up and down like a yo-yo. I think the 5-year period is the main fact to get across, other than the actual amount.

    I also like the idea of the £1m short-term protection as there are sometimes in life when a vast chunk of cash ends up in your hands, if only for a fleeting moment. It would be sods law if your bank collapsed while you had a few hundred thousand in cash from a recent house sale in your current account! Now that particular “black swan” isn’t so much of a worry (not that it was much of a worry anyway).

    John

  • 3 dearieme July 4, 2015, 12:19 am

    “I don’t think this is too bonkers. ” You are too mild: fussing about the £75k is just knickers-in-a-twist journalism. The protection for temporary big sums seems pretty welcome to me.

  • 4 BRIAN July 4, 2015, 9:10 am

    If I sell 400K of shares and it is via Barclays Stockbrokers (part of Barclays bank and ALL cash deposits are under the bank banner) for say 3 months during market turbulence, will it be covered? Does anyone know the answer please.

  • 5 BeatTheSeasons July 4, 2015, 9:31 am

    A more relevant question is what would happen if we had a Cyprus/Greece moment and our government couldn’t afford to keep their promise. In those circumstances I’d be more concerned about whether I was going to salvage anything at all – the limit being £75,000 instead of £85,000 would be the least of my worries.

  • 6 The Investor July 4, 2015, 10:28 am

    @All — Regarding broking accounts, your broker should be keeping your cash with one or more banks, and as I understand it that is where the FSCS comes in with respect to the circumstances you’re talking about. Where the broker fails, a different scheme is in operation. When we last looked into it, the system was complicated and apparently imperfect.

    See these two articles:

    http://monevator.com/investor-compensation-scheme/

    http://monevator.com/nominee-accounts/

    I’d welcome more *information* if anyone has it; please don’t post ad hoc musings under the guise of information, as this area is confusing and to some frightening enough as it is. 🙂

    @BRIAN — I don’t have a definitive answer, I’m just a humble amateur investor and blog scribe, but going on my previous reading and the investor compensation posts I linked to above, my hunch is you’d have £75,000 protected (from 1 Jan 2016) if the money was being held in a bank account or £50,000 if it as held somewhere within the broking subsidiary.

    Clearly the best people to ask here are Barclays Stockbrokers (and if you do please do come back to share what they say…)

    @BeatTheSeasons — I don’t really see why that is a “more relevant” question with respect to the FSCS but it’s not an entirely unworthy one.

    For my two pence: anything is possible, but in most scenarios I think the UK would be able to pay up what it promised as it can print money to honour its commitments — a big difference to Cyprus. Perhaps that might not hold if it were trying to control money supply for some other reason (say hyperinflation) but really you’re talking Wiemar Republic style scenarios there that are not very amenable to gaming out in advance (but very amenable to doomster prophecies… 😉 )

    Really compensation is not going to be the best place to turn in scenarios like you’re describing. I’d say better to have put some money into alternative assets in advance if it’s a real worry for you (e.g. overseas property or gold in Switzerland or diamonds sewn into your favourite hunting jacket or what have you).

  • 7 Minikins July 4, 2015, 11:07 am

    Sounds like they are resizing the safety nets ahead of an en masse tight rope wobble. The timing couldn’t be worse in terms of giving investors and savers confidence in markets. I think a good question is raised by @BeatThe Season. Although the UK is in a stronger position, if Greece opts to stay in the EU their destiny and sovereignty is no longer in their own hands and that is the biggest threat economically.

  • 8 BeatTheSeasons July 4, 2015, 11:13 am

    Fair comments by @ The Investor whom I realise is wary of the tin foil hat brigade 🙂 However, in any scenario with multiple banks going bust I think we’d have more to worry about than a £10k cut to the FSCS limit. You also have to wait a long time to get your money, as I found out with Icesave, so even moderately high inflation would still give fully protected savers a significant haircut.

  • 9 The Investor July 4, 2015, 12:27 pm

    @BeatTheSeasons — Hah! 😉 Well, to be fair as I said I don’t think it’s an unworthy question. But I do think you could write it in response to almost anything.

    Say we did a post on mortgages. “Well I think with Britain facing an eventual day of reckoning in the banking sector what particular interest rate you lock-in is going to be the least of your concerns”.

    Or household insurance: “Finding an insurer who will actually be able to stand behind their payments when the next financial crisis takes away the entire banking sector is the real non-trivial challenge”.

    Etc etc.

    Of course, some blogs/writers do write that sort of thing in response to almost anything, particularly back in the days when it looked like they might be right (2007-2010). Negative headlines generate demonstrably more interest and clicks from readers and so forth, so I understand why. And blog comment writers with even less sense of accountability never cease. (See The Telegraph comments, etc).

    As I say, I’m not in disagreement with the actual point — I’m the chap who has warned you should assume every investment can fail remember. 🙂

    But in practical terms, the cut in the FSCS limit and responding to it by recalibrating any ‘spreading around’ you’ve done previously is very actionable. Cowering before a doomsday thesis and saying doing so is “more relevant” is something else entirely, in my view. 🙂

    Cheers!

  • 10 Pete July 4, 2015, 2:31 pm

    The problem goes further than just a change of amount in my opinion.
    We have entered an era of DIY savings, investment and pension freedom et al which should be keep rules simple for all to understand. This is not the case including the amount change.
    If the exchange rate is the reason then should both cash and investments be covered?
    Further confusion arises when you view the PRA link to reveal the list of banks – this is written from a legal point of view whereas consumers don’t have that view eg First Direct is not listed as its under HSBC.
    Why should a consumer have to dig around to find high street names – that is the name people use!!
    FSCS also means if you bank with say Lloyds and your investment platform holds your cash in Lloyds, you have to find out the information & do the maths then compare risk against the £75k
    The ‘authorities’ should maintain this information for consumers to refer to not on 3rd parties to ‘pull information’ together.
    Summary : Information not fit for purpose

  • 11 kean July 5, 2015, 9:45 am

    It is completely BONKERS – whatever happened to “free” market?

    If in spirit EU is about solidarity, support & unity, and as such people can move around freely to work wherever they can find opportunities within that union then why can’t they protect their hard earned money wherever they can within the union. If the UK or any other member country is in a position to provide that haven then what exactly is the issue?

  • 12 adi July 5, 2015, 6:54 pm

    “The lowering of the deposit guarantee limit is due to the European Union Deposit Guarantee Schemes Directive. It fixes a limit of €100,000 (or the equivalent) across Europe..”

    Wrong, or at best misleading. The EU fixes a MINIMUM guarantee limit of 100,000 Euro (or equivalent). You imply this is a maximum limit and that is not true. The UK banks are simply taking advantage in a drop of value of the Euro to reduce their equivalent UK Pound guarantee limit – nobody is forcing them to do it, least of all the EU.

  • 13 The Investor July 5, 2015, 7:34 pm

    @Adi — Perhaps, but don’t blame me, I am going on information from the FSCS. To quote directly, it says:

    The change comes under the European Union Deposit Guarantee Schemes Directive. It fixes a harmonised limit of €100,000 (or the equivalent) across Europe. The new UK limit is set today.

    If you think I’ve misinterpreted that, fair enough, but I don’t think the blame lies with me in that case.

    Do you have a source for your alternative view, as it’d obviously be worth reading that and learning more. 🙂

  • 14 Steve February 8, 2017, 11:17 am

    Isn’t the fscs scheme just a vanity trick,as far as I’m aware they have very little funds to protect depositors,the scheme is there to stop people panicking if we have a financially troubled bank.
    If a bank fails we would all loose out as the government would have to use QE or print money to cover the cost,so the cost would be shared by all depositors (by devaluation of the pound).
    So in short we would all have the same amount of money we had before the bank failed but it would just be worth a lot less. Maybe that should be in the wording of the guarantee.

  • 15 The Investor February 8, 2017, 12:54 pm

    @Steve — Yes, it is a bit opaque as to how much funding they have in reserve. (Does anyone know of a published figure?) However they are regularly compensating people who’ve lost money in various ways (see the sidebar on its FAQ page for examples). Does the FSCS have the $1.3 trillion or so in reserve that HSBC from memory has in cash deposits around the world? Certainly not. However if HSBC was to fail to the extent that any compensation scheme had to cover that — without recourse to the balancing assets on its books etc etc — then we’d really be in trouble. For more realistic failures or mismatches between losses and recoverable funds, the scheme should payout.

    Whilst taking the point, I think the flaw in your QE merry-go-round argument is the distribution of losses between bailed-out depositors and the country as a whole. If you’d lost £100K in a single failed bank and via some convoluted mechanism the government ultimately bailed you out, I think you’d not lose any sleep over the fact that every citizen in the country was £100 poorer or whatnot. Rather, you’d be happy your financial life wasn’t perhaps holed below the waterline, through no fault of your own versus a saver in some other similar sized bank.

    We need banks to have an economy as constituted, as you know, so I believe we do have to ‘socialize’ these risks to some extent.

  • 16 Some Finnish Guy February 8, 2017, 1:34 pm

    One thing worth mentioning on the subject is that money with NS&I is 100% guaranteed by HM Treasury. You can put up to £2m in an NS&I Direct Saver Account (as you do) and earn 0.80% gross (0.70% after May). Greetings from Helsinki.

  • 17 The Investor February 8, 2017, 1:40 pm

    @SFG — True, mucho protection, and from memory NS&I is paying among the top rates currently, too. Certainly was a few weeks ago. 🙂 I do try to resist putting every last thing into these articles though — we’re already at 1700 words here! (I shoehorned in the nod to Lars’ “how safe is cash really” post.)

  • 18 Marked February 8, 2017, 1:46 pm

    Hi @Investor

    Just after your first direct and hsbc example (45k in each) the next paragraph you carry on the example and state the 85k will be fully covered by banks with different licences. That should refer to the £90k again since 85k is covered by all again!

  • 19 The Investor February 8, 2017, 3:03 pm

    @Marked — Ack! Thanks, fixed now.

  • 20 MyRichFuture February 8, 2017, 5:12 pm

    When Icesave (and Icelandic banks in general) hit problems in 2008, the FSCS proved a lifeline for me. Without it, all the money I’d saved in my ISA would have been lost. So it definitely works and is worth noting for any savers.

  • 21 The Rhino February 8, 2017, 6:41 pm

    strikes me if its purpose is a deterrent on bank-runs then then the only necessary pre-requisite is that the majority have 85k in one bank.

    Possibly the Icelandic example is a straw-man as the liabilities for the UK govt of some Icelandic accounts going up in smoke must be a tiny fraction of the liabilities generated from a (large) domestic bank going down, i.e. easily covered.

    It would be interesting to compare and contrast what happened to Icelandic savers back then, whether they were treated quite so gently by their govt

    Overall, bit like trident, works as a deterrent (allegedly), but as soon as you have to deploy – everyones already lost anyway.

    Even if you did lose – you’d have to be running an odd looking portfolio for it to be catastrophic I would have thought?

  • 22 The Rhino February 8, 2017, 6:42 pm

    thats weird – random paragraphs deleted from my last post – my most searing insights seem to be missing..

  • 23 The Rhino February 8, 2017, 6:45 pm

    @TI – you using ‘deep learning’ AI to autoprune the comments? Its true the robots are coming! Hopefully they’ll be able to generate the comments as well soon and we can all take a well-earned break? But then what will I do with my days. Oh god..

  • 24 rugby trader February 8, 2017, 7:12 pm

    what happens if you have a mortgage and savings with the same bank?

    let’s say you have a £500k fixed rate mortgage with Mega Bank A and you’ve inherited £200k recently and it’s currently on deposit also with Mega Bank A.

    Mega Bank A goes bust

    Does the £200k get netted off the £500k mortgage, leaving you with a £300k debt to the administrator or do you still owe £500k on the mortgage, receive £85k from the FSCS and lose £115k from your savings?

  • 25 The Rhino February 8, 2017, 7:19 pm
  • 26 The Investor February 8, 2017, 8:52 pm

    @The Rhino — No idea what’s happened to your paragraphs I’m afraid? (Let’s face it, if I had such technology and I wanted to deploy it then I’d have been wielding it around a particularly contentious political issue… 😉 )

    @rugby trader — An interesting question that I don’t have the answer to. If they did net off then having your savings with your mortgage provider could be a stellar hedge! But I am pretty sure your mortgage would just go into the hands of the receivers as one of the bank’s assets.

    Update: The Rhino’s link above does confirm that you’d still be liable for the mortgage, and states that this is what happened with the various banks we saw get into deep difficulties during and after the financial crisis.

  • 27 Jeff February 8, 2017, 11:00 pm

    To: BeatTheSeasons
    Our government could just print money to satisfy any liabilities. So to get in a mess like Cyprus of Greece, we would firstly have to join the Euro. Such stupidity seems unlikely, since the referendum result last year.

    Actually, when Greece, Italy or France really rock the boat by being the first to leave the Euro, I suppose the sterling equivalent FCSS compensation limit might fall ?

  • 28 Martyn February 9, 2017, 9:25 am

    IIRC the Eurpean Directive harmonised various existing schemes across the EU to ensure there was a level playing field. This is the reason it changes, viewed from Brussels it’s common sense, viewed from London it seems a bit pointless. Whilst I don’t like what it illustrates, it’s actual existence is reasonably benign.

    It however absolutely pointless to point out any flaws (real or imagined) in it or any other directive, or suggest that in any way the UK has any choice in this. Directives are mandatory (though annoyingly a lot of picking and choosing goes on over the channel), we are legally SUPPOSED do as we are told, by and large the UK is a good at doing as it’s told, overly so IMHO which probably played a part in the leave vote. We enthusiastically implement whatever madness gets shipped over to us

    There are lots of directives, some considerably less pleasant and more invasive (all legally binding on the member states, that said compliance in the rest of the EU can charitably be described as patchy). Mortgage affordability rules for example are also from the EU, the EU decides if you can afford the mortgage you apply for, indirectly at least. The EU end state is to have all EU countries governed from Brussels and everything be covered by directives. As everyone knows I am vehemently opposed to that end state.

  • 29 The Investor February 9, 2017, 10:02 am

    I appreciate the tangential relevance, but can we leave the politics off this thread please guys otherwise it’s just going to descend into another Brexit debate and I think it’s best we keep those quarantined to our quarterly bespoke bust-ups.

    Cheers!

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