Do you keep large deposits in bank accounts? If so, you need to understand to what extent you will be protected in event of bank failure.
For peace of mind you should establish what investor protection you have with each of your banks, and how it works. The same applies for capital you have held in other financial institutions like investment firms, insurance companies etc in the event of institutional failure. If you have any concerns about the level of protection you should establish if there are other institutions or investment structures which offer a higher level of protection, or if there are steps you can take to feel safer.
Within the EU, banks deposits up to €100,000 are protected. So if a bank fails, any deposits you have up to this limit are refunded.
In the UK, the Financial Services Compensation Scheme is based on the EU compensation scheme and is available to savers if a UK regulated bank or financial institution fails.
At present, the limit per institution (i.e. across all accounts held with the same institution) is £85,000. This figure was based on the exchange rate at the time the €100,000 guarantee was introduced.
Two changes to the Financial Services Compensation Scheme have now been announced.
In July 2015, a new rule was introduced to protect savings of up to £1 million for a period of up to six months to cover ‘life events’, such as selling your home, inheritances, compensation payments etc; situations that could lead to you having a temporarily high balance.
From 1st January 2016, the standard protection amount is reducing to £75,000, because the exchange rate has changed. The UK regulators have a duty to review the amount every five years to ensure the protection is similar to the rest of the EU.
It is worth noting that an institution is not the same as a bank. So Halifax and Bank of Scotland are one institution, for example.
If you have more than £75,000 held with a single UK regulated institution, the excess over £75,000 will not be protected. You may wish to consider reducing balances so that these are spread to provide more protection (the actual balance should be lower than this to give cover to any interest to be added).
Those who have less than €100,000 with the same institution regulated elsewhere within the Eurozone are not affected, as the Euro amount has not changed. However if you have bank deposits over €100,000 you should consider ways to protect your savings from the risk of institutional failure.
Note that since the Isle of Man, Jersey and Guernsey are not in the EU, banks which are regulated there are not covered by the EU scheme or the UK Financial Services Compensation Scheme. These jurisdictions have their own compensation schemes, with a limit of £50,000.
Besides spreading your deposits, you can move capital into alternate investment arrangements that provide a higher level of protection. For example Luxembourg offers a state controlled investor protection regime which provides maximum security to investors without limit.
You should also ensure that you have adequate diversification across different investment assets, because this decreases risk as well as increasing the potential for improved returns.
Talk to a wealth management adviser to see if there are steps you can take to increase your investor protection, in line with your particular circumstances.
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