As market uncertainty increases, cash may become a greater consideration. From 30th January 2017, the sum protected by the Financial Services Compensation Scheme (FSCS) in a UK regulated current or savings account and cash ISA increased to £85,000 from £75,000. The FSCS guarantees 100% of that amount, but when considering this, it should be noted that the maximum compensation amount is per financial institution, and not per bank.
Let's find out why differentiating between banks and financial institutions is so important.
Woodgate Financial Planning has always maintained the importance of spreading your eggs across multiple baskets, however it's not always as easy as that when certain banks are owned by other banks.
A single banking licence can cover several different banks, building societies or brands, and it is the licence that is considered by the FSCS when compensating you.
This therefore poses the following question...
What Constitutes a Financial Institution?
Let's review how certain associated organisations relate to one another, for which we have provided three cases with example banks:
Let's say you were to deposit with Halifax and Bank of Scotland. Because of the nature of their association - i.e. Halifax's operation as a trading division of Bank of Scotland, you would only qualify for one lot of compensation across the two organisations.
Depositing with Barclays Bank and Santander would incur two sets of compensation, as the banks are not associated with each other.
This is where it can get a little confusing, as some banks are part of other banks but operate under separate licences. NatWest is associated with RBS as it is part of the RBS Group, however it operates under its own authorisation, therefore each bank has a separate banking licence. If you deposited with RBS and NatWest, you’d therefore be entitled to two sets of compensation (i.e. you’d be entitled to compensation for each).
When financial institutions such as building societies merge, this also becomes a matter that is worth further consideration. Also joint accounts qualify for double the FSCS compensation scheme allowance, due to each individual having their own allowance. Therefore, the £85,000 is doubled to £170,000.
If you want to make sure your money is safe, you can use the tool provided by Which? below to assess which banks are owned by other banks. It may provide some surprising results!
When considering the safety of your money, higher short-term protection allowance of up to £1 million is available for six months following certain ‘life events’. The six month period commences once an individual becomes entitled to a payment, or once the amount has been paid into their account, whichever occurs later.
A ‘life event’ includes monies received from the sale of a property (not buy-to-let), inheritances, redundancy or insurance and compensation payouts. If this happens to you, you must provide proof of the source of the monies in order for compensation to be granted, the FSCS will pay the agreed figure (over and above the £85,000 allowance and up to the maximum of £1 million) within three months of a claim.
If you have larger sums deposited, ensuring that your cash is protected can be quite complex. It's definitely worth examining your current situation - it'll give you the peace of mind that your money is safe, subject to the FSCS guidelines.
If you have any questions or concerns about the safety of your money, please feel free to get in touch with us.