FSCS: protecting savers when a bank goes bust

Back in April, visitors to this site may have read about the FSCS (Financial Services Compensation Scheme), which will refund some or all of a saver’s money if their bank / building society goes bust.

It’s very bad for the economy (and people’s confidence in our whole financial system) when an institution goes bust, and it can cost the taxpayer billions to prevent this – as happened with Northern Rock.

FSCS: preventing a run on the bank
When a bank / building society gets into financial trouble, there’s a chance the public’s reaction will be more damaging than the trouble itself – if too many savers think there’s a chance it’ll go bust, they might all rush to take their savings out before the institution runs out of money. This is known as a ‘run on the bank’, and it can end up actually causing a financial institution to go bust.

So the FSCS isn’t just there to refund money. It’s there to reassure savers: when people know their savings are safe, they’re much less likely to withdraw them as soon as the bank announces some bad news.

The FSCS rules changed back in October, and Chancellor Alistair Darling has just proposed new changes that’ll give savers even more protection*.

• Before October 2007, the FSCS would only compensate someone for 100% of the first £2,000, and for 90% of the next £33,000. So someone with:

  • £5,000 of savings

    was guaranteed

    £4,700

  • £50,000 of savings

    was guaranteed

    £31,700

  • £500,000 of savings

    was guaranteed

    £31,700

• On 1 October 2007, the 100% guarantee was extended to cover the full first £35,000. So someone with:

  • £5,000 of savings

    was guaranteed

    £5,000

  • £50,000 of savings

    was guaranteed

    £35,000

  • £500,000 of savings

    was guaranteed

    £35,000

• Now, it looks like that 100% guarantee will cover the first £50,000 of someone’s savings (although that change isn’t definite yet). So someone with:

  • £5,000 of savings

    would be guaranteed

    £5,000

  • £50,000 of savings

    would be guaranteed

    £50,000

  • £500,000 of savings

    would be guaranteed

    £50,000

For more on the FSCS – and on how banks can go bust – click check out April’s article (just remember the figures aren’t up to date).

*Please note that this guaranteed refund applies for each organisation you’re saving with. So if you have more than £50,000 in savings, it makes sense to put it in two or more separate banks / building societies. The word ‘separate’ is extremely important here – you could have a total of £100,000 saved in two banks which are owned by the same parent company (so they share the same FSA (Financial Services Authority) registration). If that parent company went bust, you’d only be guaranteed a refund of the first £50,000.