Northern Rock: How To Keep Your Cool

The crisis at Northern Rock has caused many of its customers to panic. Here we tell you why you don't need to.

Many pundits -- including us -- are telling Northern Rock customers not to panic following the dramatic developments at the mortgage bank last week. The pundits are relatively relaxed because it's unlikely that the Bank of England (BoE) would let a major lender go under just like that. But maybe you don't believe the pundits...If that's the case, there's another reason why you still shouldn't panic. It's the Financial Services Compensation Scheme (FSCS), which protects savings accounts across the UK. As long as the company in question is authorised by the Financial Services Authority (FSA), and most of them are, then you'll be covered. The scheme is your last port of call. The FSCS can only pay compensation if a firm is unable to pay claims against it. Generally this will apply if the company has ceased trading and has insufficient assets to meet claims, or is in insolvency. Just to reiterate, in the FSA's opinion, Northern Rock is solvent and meets all its capital requirements, so you can still access your savings. You won't need to turn to the FSCS for help just yet.But should the situation deteriorate - and I'm not saying it will - what level of protection are you entitled to?If you have a savings account then the maximum level of compensation is £31,700. This is broken down so the first £2,000 is 100% protected. The next £33,000 worth of savings is 90% protected. Happily, if you have savings of £2,000 or less then you have absolutely nothing to worry about, even in the unlikely event of Northern Rock going bust. If you've deposited a lump sum of £20,000 then you would receive compensation of £18,200. You may not be able to recover all of your savings, but at least the vast majority is safeguarded. People with larger deposits are more at risk. If you're really concerned that your savings are vulnerable, it's best not to put all your eggs in one basket. You could consider taking out accounts with several different banks or building societies and deposit no more than £35,000 in each. This could also be an ideal time to review your savings to ensure you're getting the most competitive rates of interest. Why not compare different accounts at The Fool's savings centre?But a word of caution here: Make sure you don't choose more than one subsidiary in a group as you'll only be covered once by the FSCS. For example, the RBS group incorporates NatWest, Royal Bank of Scotland, Direct Line and Ulster Bank. The £31,700 maximum compensation limit will only apply once even if you hold a separate account with each company. While we're on the subject of consumer protection, here's a quick summary of how the FSCS safeguards various products:ProductMaximum CompensationCompensation BreakdownSavings accounts£31,700100% of the first £2,000, 90% of the next £33,000Investments (including unit trusts and personal pension plans)£48,000100% of the first £30,000, 90% of the next £20,000Long-term insurance (e.g. pensions and life assurance)Unlimited100% of the first £2,000, 90% of the remainderGeneral insurance - compulsory (e.g. car insurance)Unlimited100% of the claimGeneral insurance - non-compulsory (e.g. buildings and contents insurance)Unlimited100% of the first £2,000, 90% of the remainderMortgage advice and arranging (where money is lost as a result of inaccurate/incomplete advice)£48,000100% of the first £30,000, 90% of the next £20,000So if you're worried about any money you may have in the above homes, you should be able to sleep soundly from now on..... More: Northern Rock: Are Building Societies Safer?Further details regarding the FSCS can be found here.Since this article was first published, Alastair Darling, the chancellor, has announced that the government will guarantee all deposits with Northern Rock.