The eurozone crisis might seem very far away, but it could soon hit home if you have savings in a foreign bank. Are you protected?
Some of the best buy savings accounts at the moment are offered by foreign banks such as ING Direct and the Bank of Cyprus.
But the problems in the eurozone seem to be spreading. Italy, Ireland, Portugal, Spain, Greece, Belgium and Luxemburg are all struggling with their national finances and who knows who’ll be next?
Compensation schemes
Although, in theory, all banks operating in the UK will have a compensation scheme in place in the event that a bank goes bust, the schemes might not to be as robust as you might expect. And crucially, most compensation schemes are untested.
A worst case scenario is a repeat of the Icelandic banking crisis. Icelandic bank Landsbanki collapsed in October 2008, leaving UK savers with its popular Icesave account in the lurch. Icesave had more than 300,000 UK depositors with a collective balance of £5 billion.
UK savers’ money was protected under a “passport” scheme in Iceland. Under the scheme the Icelandic Government should have refunded UK savers the first £16,000 of their savings with the UK Financial Services Compensation Scheme (FSCS) making up the rest.
But in practice the Icelandic Government didn’t have enough cash to refund UK savers, forcing the UK Government to step in and guarantee 100% of deposits. Although savers with Icesave got their money back, the episode left savers wary of foreign banks and so-called passport compensation schemes.
The Financial Services Compensation Scheme
The UK Financial Services Compensation Scheme (FSCS) protects money in UK banks up to £85,000 per person per institution. The FSCS is a fund set up by UK financial bodies and regulated by the FSA. It promises that, in the event of a bank collapsing, you’ll get your money back up to the maximum amount.
Foreign banks either have a license to operate in the UK and are covered by the FSCS or use a “passport” scheme in their home country. To use the passport scheme the bank’s home country must be within the European Economic Area (EEA).
Passport schemes
Savings accounts with ING Direct, Anglo-Irish, Triodos, the Bank of Cyprus have all appeared in the best buy savings tables at some point, and all are protected by passport schemes.
The trouble is, as with the Icelandic episode, there’s no precedent for a Dutch or Cypriot bank paying compensation to UK savers. And while there’s nothing to say any of these banks are likely to go under in the near future, savers should ask themselves what would happen if the worst comes to the worst and they did. Would the passport schemes pay out? Maybe. But is “maybe” good enough protection for your savings?
[SPOTLIGHT]On a positive note, since December 2010 all European countries are required to have a compensation limit of €100,000 (about £85,000). So, whereas in the past the amount protected varied depending on the home country of the bank, this is no longer a factor.
Fully protected foreign banks
However, not all foreign banks operating in the UK protect savers’ money under a passport scheme. Some offer full protection under the FSCS.
First Save accounts, for example, are offered by FBN Bank (UK) which is a wholly owned subsidiary of First Bank of Nigeria. Despite originating in a country with a supposedly corrupt regime, FBN is regulated by the Financial Services Authority and depositors are protected by the FSCS.
Likewise, United National Bank, which was formed in 2001 from the merger of the UK branches of two Pakistani banks, United Bank Limited and National Bank of Pakistan, is a member of the FSCS.
Spanish-owned bank Santander is fully regulated in the UK, but be aware that its banking license includes Alliance & Leicester and Cahoot. So if you have savings totaling more than £85,000 between these brands you’ll need to shift some of this cash elsewhere to be 100% sure it’s safe.
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