The spectres of Bradford and Bingley, Northern Rock and Ice Save caused worrying moments for individuals with cash invested in one of these groups. Consumer confidence was shaken. One of the aims of the U.K’s Financial Services Compensation Scheme is to restore consumer confidence in the banking industry. As of 31st December 2010 personal guarantee limits were raised from £50,000 to £85,000 for both savings accounts and current accounts with banks, building societies and credit unions which are regulated by the Financial Services Authority.
The Financial Services Compensation Scheme (FSCS) is a non profit body which is independent of both the government and the financial industry. It protects consumers if firms cease trading or go into default and cannot pay their financial obligations. However the FSCS cannot guarantee any amounts above £85,000, making it prudent for investors to hold no more than that amount with any one financial institution.
The exception is joint accounts which are guaranteed up to £170,000, but the limit is set per person not per account. The scheme also covers accounts which are in the name of children.
As the guaranteed limit is set at £85,000 it is wise to invest less than this amount in an interest bearing account as any accrued interest will not be covered if it exceeds the guaranteed limit. In addition to increasing the guaranteed amount by £35,000 per person the FSCS has stated that payouts are targeted to be made within 7 – 20 days. The FSCS additionally covers any foreign banks which operate in the U.K. under FSA regulations.
The £85,000 guarantee brings the U.K. into line with the European Economic Area States which guarantees amounts up to 100,000 Euros. Those who bank with European Economic Area banks which operate in the U.K will be covered under the European guarantee scheme.
In the event that a financial firm is unable to meet its commitments to investors, account holders make a claim directly to the FSCS, under their no fee claim service. There is no need to pay the expense of lawyers or accountants to submit a claim.
The FSCS is funded by the firms which are regulated under the FSA, thus indirectly funded by consumers who contribute to firms’ profits. The FSA dictates the amount which each bank or other financial body must pay to the FSCS.
It is reassuring to know that the amount of funds invested with a financial institute regulated by the FSA has increased to £85,000. Consumers are well advised to spread any investments above this amount between various institutions so there is no danger of losing out, as no compensation will be paid above this level if all the eggs are kept in one basket.