The Bank of England has released a proposal paper to help better protect savers and smooth concerns in the savings market.
Among the four proposals are details to increase depositor’s protection from £85,000 up to £1million but only for temporary savings. The new Temporary High Balance (THB) protection will protect savers for up to 6 months on deposits from private home sales, deposits linked to life events such as marriage, divorce, retirement and redundancy to insurance benefits or compensation for criminal injuries, which all in theory, would only generally be in an account for a temporary period. The Bank of England claims this protection would cover 99% of house sales in England and Wales and 92% of house sales in London.
The current Financial Services Compensation Scheme (FSCS) rules cover up to £85,000 per person, per banking licence, which for the majority would be sufficient to cover them in the event of their bank or building society failing. However, for the small percentage with larger balances in their savings accounts, the current rules pose a problem, and they’re not without their complications too.
The £85,000 protection is per person, per banking licence but many well-known providers share a banking licence, therefore savers who believe their money is spread could find themselves under protected without even realising it. One example of this is the Bank of Scotland which shares a banking licence with Halifax, BM Savings, Intelligent Finance, AA, Aviva, SAGA and St James Place.
The Financial Services Compensation Scheme is a life boat for savers, especially in recent years as the vulnerability of financial institutions has been exposed. Although we’ve yet to call on the FSCS to pay out due to collapse of a UK bank or building society it has paid out over the years on some failed Credit Unions, therefore the importance of it is paramount.
For savers with large amounts it’s wise to spread money between banking licences to get a balance of the best rates and protection. The regulator (the Prudential Regulation Authority) states that it believes the 6 months window should be enough time for savers to split deposits between institutions. The protection is there to be utilised so why have money in a savings account exposed to risk unless you have to? It’s bad enough to have large balances languishing in poor paying accounts, never mind risking the capital as well.
The consultation period ends on the 6 January 2015 with a proposed date of July 2015 for changes to come into force, so we’ll know more details from then. In the meantime it does look like the industry is continuing to look at ways to help and support savers and we are certainly fans of that.
Although it does raise a few questions. Why now? The run on Northern Rock was over 6 years ago now.
Also the cost implications. You would expect that any increase to the FSCS limits will hit the banks and building societies where it hurts, requiring an increase to the levy charged to them to ensure your money is protected along with IT and administration costs to implement the changes. This could well have a knock on effect to the savings rates being offered. Effectively giving with one hand and taking with another, the financial protection has to come from somewhere.
This is a cynical view however, given that more protection has to be a good thing. But there’s still a lot of work that needs to be done to inspire people to save these days. Rates have never been lower and it’s important that we’re all keeping our money on the move to get the best rates, if nothing else it will help stimulate the market and could improve competition, and of course put some extra pounds in our pockets.
If you want to know how to safely split your savings whilst getting the best rates, you can speak directly to a savings expert on 0800 321 3581, as always we’re happy to help.
Savers who are concerned that they may be under-protected can check our handy FSCS guide which details all bank and building society licence information and most importantly, which providers share a licence.