HSBC has been fined by the Prudential Regulation Authority (PRA), a part of the Bank of England, £57.4 million this week, for historic failures in deposit protection identification and notification. What this actually means is that the bank had failed to put in place systems that would have accurately identified their customers deposits that would have been protected by the Financial Services Compensation Scheme (FSCS) should the bank have gone into administration.
The Bank of England Deposit Protection Rules require firms to put in place adequate systems and controls that the FSCS would rely on in order to make prompt repayments of eligible deposits to the customers of a bank, building society or credit union that becomes insolvent.
Not only had HSBC incorrectly identified 99% of its eligible deposits as ‘ineligible for FSCS protection’, it failed to confirm its system failures – citing instead that its systems satisfied the requirements of the Depositor Protection Rules, for multiple years.
How much does the Financial Service Compensation Scheme protect?
The Financial Services Compensation Scheme (FSCS) was set up under the Financial Services and Markets Act 2000 in order to compensate customers if a firm has stopped trading or is unable to pay claims made against it.
The banking crisis of 2008 brought into focus issues around the safety of holding larger sums of money with banks and building societies and savers started to question exactly what would happen if their provider went out of business.
In a nutshell, the FSCS is in place to protect savers and compensate them if their chosen savings provider ceases trading and is unable to return their funds. The FSCS exists to protect consumers and is effectively a ‘last resort’ fund for savers, if their bank or building society goes bust. It is funded by the financial services industry as a whole in the form of a levy, paid by each UK authorised financial services firm. Any firm that is authorised by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) is covered by the FSCS.
There is a limit as to how much of your deposits are protected by the FSCS and this currently stands at £85,000 per person, per banking licence. Those with joint accounts would be protected up to £170,000 with each banking licence. Interestingly, the protection limit is actually at its highest level since the introduction of the FSCS and there have been a number of changes to the limit over the years.
The term banking licence is important as some banking brands may share a licence, so you need to consider all the money held across linked brands to check you are protected. For example, HSBC and First Direct are both trading names of HSBC Bank plc so customers who hold deposits with both brands will need to consider the amount they hold in total with both names – and are eligible to make just one claim up to the FSCS deposit. For more information about FSCS licences, take a look at our guide to the FSCS here.
The good news is that although this was a terrible error for HSBC to make which could have seen savers waiting for far longer than the expected seven days for their money to be returned had the bank become insolvent, the FSCS would still have protected this cash. The FSCS confirmed to me that “someone’s eligibility is not affected by a banks reporting error. Their eligibility is protected in law.”
Hopefully, this hefty fine, the second highest to date imposed by the regular, will make other providers review their own reporting procedures, to make sure they don’t suffer a similar fate.