FSCS protection to increase to £85,000

24 November 2016   By Samantha Smith

THE amount of money savers will be compensated for if their bank or building society goes bust will be increased to £85,000 by the end of January next year, the Bank of England have said.

savings piggy bank
Credit: Krakenimages.com/Shutterstock.com

Since January this year, savers have only been covered for the first £75,000 they have saved with any one licensed institution, thanks to sterling's previous strong form against the euro.

But since the EU referendum in June, the pound has fallen more than 10% against the euro - prompting the Bank of England's decision to adjust our level of protection to match that given to other EU savers four years earlier than scheduled.

Other protections, such as the £1 million limit for temporary deposits, will remain unchanged.

The short lived £75,000 limit

Protection for our money
How our savings are covered
Banks and building societies:
who owns whom?
How our pensions are protected
Temporary deposits: a special case

Under the terms of the EU Deposit Guarantee Schemes Directive (DGSD), savers across the European Union are to receive compensation for 100% of their savings up to €100,000.

EU member states that aren't part of the single currency are required to recalculate how much this is equivalent to every five years, and adjust their own protection guarantees accordingly.

In July 2015, when the guaranteed amount was last recalculated, the pound was strong and the euro was going through a certain amount of turmoil - with the result that €100,000 was worth less in the UK.

As the protection being offered to savers was cut by a significant amount - £10,000 - overnight, the Government stepped in to offer to cover the extra £10,000 until the start of this year, giving those fortunate enough to have more than £75,000 time to find somewhere to move the extra money.

But if the guarantee is supposed to be recalculated every five years, why is it being revised upwards again less than 18 months later?

Why the change?

The answer is Brexit.

The DGSD allows for more frequent adjustments under certain circumstances - like "unforeseen events such as currency fluctuations" of the sort we've experienced since the EU referendum.

It's now five months since the Financial Times posted this, as the early markets reeled in reaction to the unexpected result:

While sterling is no longer experiencing quite as much turbulence, the Bank of England's decision to resort to the "unforeseen events" card suggests that they think it's going to stay down for some time - or as they put it:

"... a structural shift in the exchange rate has occurred."

Setting our own rules

It's possible that this limit could stay in place on a more or less permanent basis as well - because when we do leave the EU, there'll be no reason for us to keep our deposit guarantee in line with theirs.

The Bank of England say that - barring any further unforeseen circumstances - they don't intend to make any further adjustments, which would suit the chairman of the Treasury Select Committee just fine.

Andrew Tyrie calls the need to adjust the level of FSCS protection to match that of the rest of the EU "absurd", saying that Brexit "should give the UK the opportunity to set its own level of protection".

He points to the "frequent changes" - seven in the past decade - "at the discretion of the European Commission" to back his suggestion that the UK should set its own deposit guarantee level.

That's slightly unfair, though, as most of those changes were on an EU-wide basis, and in favour of savers: raising the guarantee from various amounts below £50,000 (or €50,000) to that level in 2008, and then to €100,000 or its equivalent by the end of 2010.

We then had five years before the Bank of England revised the UK protections downwards - and it's entirely their choice to act now, rather than waiting to see if things change again in the near future.

More protection, less money

The Bank of England say that raising the level of protection provided by the FSCS will mean about 98% of us will be completely covered should the worst happen - up from about 97% under the £75,000 guarantee.

Although the proposals to return to the higher amount have already been approved by the Treasury and the European Commission, they're open to consultation until December 16th.

Then from January 30th - when the change is due to come into effect - banks, building societies and credit unions will have six months from to make sure all their publicity and information refers to the new higher amount.

But we have to wonder - considering that some 93% of us have less than £50,000 in savings, and with wages stagnant and prices rising once more, how many will really be in a position to take advantage of the extra protection?

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