When you consider the Guardian reported that NatWest tripled its profits in the third quarter of 2021, the idea of your bank going bankrupt may sound somewhat ludicrous.
Despite a pandemic that put the brakes on economies around the world, rising inflation, and continued uncertainty thanks to the Covid pandemic, the bank reported a profit of £1.1 billion.
That said, another article explains that the British government could be paid a significant amount of the profit. This is because it has a 55% stake in the bank after financially propping up the Royal Bank of Scotland (RBS) before it became part of the NatWest Group.
You may remember that, despite being a major high street bank, RBS relied on government help to survive after the 2008 financial crisis. It was a crisis that saw Lehman Brothers and the Icelandic bank Icesave go bankrupt, and caused a run on banks such as Northern Rock as customers tried to get hold of their savings.
While lessons were learned in the wake of the bankruptcies, which makes it unlikely that other banks could go out of business, no one can guarantee it.
If it were to happen, in Britain we have the Financial Services Compensation Scheme (FSCS). It offers protection for money that’s with banks or other financial companies that go out of business and, in 2019/20, paid out £527 million and helped 258,000 people.
As payment from the FSCS is subject to certain criteria, the following are five things you need to know if the unthinkable happens to help ensure you don’t lose significant sums of money.
1. The FSCS covers authorised financial services companies
In most cases, your money is protected up to a maximum of £85,000 should the financial organisation holding your money fail. The organisation has to be an authorised company, such as:
- Banks and building societies
- Credit unions
- Debt management companies
- Home finance intermediation firms
- Life and pension providers
- Investment companies
The cover is per person and any amount above £85,000 could be lost. If you have a joint account, cover is typically doubled to £170,000.
With insurance companies you could have increased levels of cover, which include:
- General insurance: 90-100% of the money lost, depending on circumstances
- Long-term care insurance: 100% with no upper limit if the firm failed after July 2015
- Payment protection insurance: 90% of the total claim, if the firm failed after January 2020.
2. To be eligible you need to meet certain criteria
The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) set rules around the FSCS. This means you have to meet certain conditions to be eligible for the scheme, which include:
- You must have genuinely lost the money due to the company’s bankruptcy.
- The company must have been authorised by the FCA or PRA when you used it.
- The money was for personal use, although in some situations businesses and charities may be able to claim.
- The financial services company must be unable to return your money or have failed to return it.
3. You can only claim per financial institution – not per bank
An important point to remember about the FSCS is that it applies to each financial institution that has a “banking authorisation”. This means that if the organisation that owns the bank your money is with also owns another bank you have cash with, you will only be able to claim once.
For example, if you have accounts with the Bank of Scotland, Halifax and Birmingham Midshires, the maximum you can claim is £85,000. Consumer watchdog Which? provides a “who owns who in banking” facility that allows you to check.
4. In some circumstances you could be covered for more than £85,000
Your money could have £1 million worth of protection for six months in certain situations. This is where higher amounts are in your bank account as a result of certain events, which include:
- A house sale
- Redundancy
- An inheritance payout
Please note that because of Covid, the six months was extended to 12 months from August 2020. That said, it reverted back to six months from February 2021.
5. Some offshore accounts could be covered by the FSCS
While an offshore savings account may be attractive, as they can pay higher interest rates, banks in the European Economic Area (EEA) have their own compensation schemes. The EEA’s compensation level is €100,000.
As banks outside the EEC need to be authorised by the FCA to operate in the UK, they are typically covered by the UK’s FSCS scheme.
Get in touch
If you would like to discuss how protected your hard-earned money is, and how you could better protect it, email us on admin@stonegatewealth.co.uk or call on 01785 876222.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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