The Perils Of Saving Offshore

Seven thousand people could lose savings worth £860 million following the collapse of an Isle of Man-based bank. They've been called greedy tax dodgers, but they're not...

In the spring of 2005, following the sale of my house, I had a large cash sum looking for a safe home. Like most people with savings, my goal was to find a secure place for this pot, while earning a table-topping rate of interest.

During the course of my investigations, I looked into offshore savings accounts, but decided against them in the end.

Why? I was put off squirreling my nuts offshore due to the lack of depositor protection offered in these islands, as I explained a year ago in Are Offshore Savings Accounts Safe?.

In the tax havens of Guernsey and Jersey, there was (and is) no depositor protection whatsoever. Likewise, in 2007, the safety-net was pretty weak in the Isle of Man. And while the Isle of Man scheme has recently been strengthened to the first £50,000 of savings (the same level of protection offered by the UK's Financial Services Compensation Scheme), it's massively under-funded.

So I decided saving offshore was too risky for my liking, and I invested my money in a UK bank instead.

Looking back, I wish that I had done much more to warn Fool readers about the perils of saving offshore. In particular, I should have followed my instincts and urged readers to steer clear of the riskiest banks: offshore subsidiaries without a parental guarantee from a UK-based parent.

The Icelandic aftermath

I feel especially upset for customers of Kaupthing Singer & Friedlander (KSF), a subsidiary of collapsed Icelandic bank Kaupthing, who had money with its Isle of Man subsidiary. Given that their deposits are not unprotected by the UK government, these stressed savers are forced to rely on the Isle of Man's limited protection scheme, plus any payout from the wind-up of parent bank Kaupthing.

According to various sources, seven thousand UK savers have a total of £860 million tied up in KSF (IoM). Although the upgraded IoM scheme now covers the first £50,000 on deposit per person, the IoM government simply doesn't have the cash to pay out £350 million (7,000 x £50,000).

Customers of Landsbanki Guernsey, a division of another failed Icelandic bank, are in a similar boat. There is no depositor protection in Guernsey, but the administrator of the bank aims to recover at least three-tenths (30%) of these savers' deposits.

Aren't these people greedy tax dodgers?

Sadly, I've read comments online describing these savers as `greedy tax dodgers looking for a government handout'. This description is unfair as, according to the KSFIOM Depositors' Action Group, out of 479 savers registered with the website:

 Three-fifths (60%) are UK citizens working or living overseas, who found it all-but-impossible to open a UK savings account without a permanent address here.

 UK citizens who are UK-resident account for another quarter (25%).

 Only one in nine (11%) are non-UK citizens who are non-resident.

So, the majority of savers who lost out did so because strict money-laundering regulations prevented them from banking their cash in the UK, where it would be protected by the FSCS and the implicit government guarantee not to allow UK savers to lose a penny. It's also worth noting that KSFIOM depositors stand to lose vast sums, as follows:

What if it happened to you?

Some readers may not have much sympathy for savers who chose to deposit hundreds of thousands of pounds in a small offshore bank. I think the story is much more complex than this. Many of these well-off savers sold UK businesses before retiring abroad. Others currently live and work overseas, and thus are prevented from keeping their nest eggs safe in the UK.

So, before you move to criticise these unfortunate folk, put yourself in their shoes. How would you feel if your lifetime's work was wiped out overnight?

Finally, this shows that even long-established banks in politically and economically stable regions are not necessarily bombproof. Kaupthing Singer & Friedlander has operated in one form or another in the Isle of Man since 1971 -- a record which may have convinced savers of its stability. Let's hope the UK, Icelandic and Isle of Man governments will be able to untangle this mess and restore the majority (if not all) of these funds to their owners -- as the alternative may be too much to bear.

More: Big Banks For Safe Savings | Glimmer Of Hope For Kaupthing Savers | ING Still Looks Fine