How are your savings protected?
Bank deposit guarantee schemes
By Paul Montague, Partner, Blevins Franks
EU banks provide a deposit guarantee of up to €100,000, and the UK has a similar £85,000. In Jersey, Guernsey and Isle of Man, however, compensation is limited to £50,000.
With the global banking industry back in the news again, this is a good time to look at what bank guarantees are in place in the event of institutional failure.
When you’ve worked hard to build up your savings, for peace of mind, you should always establish what investor protection you have with each of the financial institutions you use – not just banks, but also investment firms, insurance companies etc. Where necessary, take steps to improve your position.
So, what protection do banks offer?
Under an EU directive, each EU country provides a bank deposit guarantee of €100,000. In the event a bank fails, your national deposit guarantee scheme (Fondo de Garantía de Depósitos de Entidades de Crédito (FGD) in Spain) will refund your savings, up to the limit of €100,000.
Savings above the €100,000 could be lost if your bank fails. You may receive additional funds following any distribution of assets as part of the insolvency process, but this would depend on the bank’s situation at the time.
Deposits are covered per depositor, so couples with joint accounts have €200,000 protected. Note that the guarantee is per banking group, not per bank account or even per bank – some banks with different names form part of the same group, so be careful.
Under certain circumstances (for example, after selling a property) you may be eligible for higher protection for temporary high balances. In Spain this is just three months).
Spain currently aims to make the payable amount available within ten working days, reducing to seven from 2024.
In the UK, accounts in regulated banks are protected by the Financial Services Compensation Scheme (FSCS). The amount protected matches that offered by the EU and is currently £85,000. It also provides a £1 million protection limit for temporary high balances (up to six months).
Protection is per depositor (accounts in joint names are protected up to £170,000), and per banking institution. An institution is not the same as a bank; Halifax and Bank of Scotland, for example, are part of the same institution.
The FSCS aims to pay compensation within seven days of a bank or building society failing, though more complex cases will take longer.
According to the FSCS website, there are currently no plans to change the £85,000 limit post Brexit. It also explains that its protection “is not dependent upon the depositor’s place of residence, but where the bank, building society or credit union holds the deposit”, so nothing changes for UK nationals living in the EU with savings in a UK authorised bank. However, since 1 January 2021, protection for deposits held in EU/EEA branches of UK firms are now covered by the local EEA deposit guarantee scheme in that country, and no longer by the FSCS.
UK offshore centres
Banks in the Channel Islands and Isle of Man are not covered by the UK scheme, even if they are divisions of UK banks. Instead you rely on their local guarantee schemes, which offer lower levels of protection.
The Isle of Man’s Depositors’ Compensation Scheme (DCS) provides compensation of up to £50,000 per person for covered banks. There is no time limit for the payment. The amount of compensation paid and timing of payments will depend upon the size, asset quality and profile of the failed bank, and the amount of funding contributed. There is no standing fund for the DCS. It is funded if and when required by contributions from participating banks and the Isle of Man Treasury, capped at £200 million for a 10-year period.
The limit of Jersey and Guernsey’s depositors’ compensation schemes is also £50,000, capped at £100 million in any five-year period. They aim to pay compensation within three months of a bank failure.
Protecting your savings
Many savers with larger cash deposits have spread them out over more than one bank. It results in more paperwork, but is worth it for peace of mind.
Others have opted to move capital into arrangements which provide a higher level of investor protection than banks can offer. For example, if you have an investment bond issued by a Luxembourg regulated insurance company, your investment assets are protected should the insurance company fail.
Luxembourg provides very robust protection for life assurance policy holders, the strongest in Europe. The cornerstone of its ‘Triangle of Security’ investor protection regime is the legal requirement that all clients’ assets must be held by an independent custodian bank approved by the state regulator. The bank is required to ring-fence clients’ securities (investment funds, shares, bonds etc) so they are off its balance sheet. If the bank fails, these securities remain in segregated client accounts. 100% of the policyholder’s securities are therefore protected. This does not include cash deposits, but cash held in monetary funds are treated as securities and so are protected.
In any case, you should always ensure you have adequate diversification across different investment assets. This reduces risk as well as increasing the potential for improved returns.
And as always, your savings and investment decisions should be based around your personal objectives, circumstances, time horizon and risk profile. For the best results, take personalised, regulated advice on asset protection and a suitable tax-efficient investment approach for you in Spain.
All information contained in this article is based on our understanding of legislation and practice, in the UK and overseas at the time of writing; this may change in the future.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.