The Financial Services Compensation Scheme (FSCS) is the United Kingdom’s compensation fund of last resort for customers of authorised financial services firms, including depositors of banks, building societies and credit unions. The FSCS is responsible for paying compensation to depositors in the event of those deposits becoming unavailable due to the failure of the deposit-taking firm. This compensation is subject to an upper limit.
In December 2010 the deposit protection limit was set at £85,000. It was set at that sum to reflect a European requirement to provide protection of up to €100,000, at that time equivalent to £85,000. In accordance with the revised Deposit Guarantee Scheme Directive, the United Kingdom is required to realign the sterling value of the FSCS’s coverage level by reference to the exchange rate that applied on 3 July of this year (today’s date). The current strength of Sterling relative to the Euro means that, as a result of that realignment, the FSCS coverage level needs to be reset to £75,000.
In order to prevent depositors being adversely affected by a sudden change in the level of cover, the government has legislated to maintain the current level of £85,000 until the end of the year for those depositors who were entitled to that level of protection before 3 July and who will continue to be entitled to FSCS protection after that date. Individuals and small businesses will continue to be entitled to FSCS protection of up to £85,000 until 31 December 2015. From 1 January 2016 the FSCS’s deposit protection limit for individuals and small businesses will be £75,000.
This reduction will affect a very small number of retail depositors. Around 95% of individuals and small businesses will be unaffected. In addition, the revised Deposit Guarantee Schemes Directive means that from 3 July the FSCS will provide additional deposit protection coverage of up to £1m for depositors who temporarily have high balances due to events such as house sales or pension lump sums.
For the small number of depositors affected by the change in the level of cover, it needs to be recalled that the FSCS provides protection on a per depositor, per authorised firm basis. If a person has deposits at two different authorised firms, those deposits are covered by separate FSCS protection.
As a result of the revised Deposit Guarantee Schemes Directive, large corporates will receive deposit protection coverage for the first time and will be covered from 3 July for deposits up to the new £75,000 limit.
Sir Edward Garnier, MP for Harborough, Oadby and Wigston, said: “Whilst this is good news in the sense that it shows the strength of the economy it does mean that depositors with more than £75,000 in any one account will need perhaps to think about spreading the risk across more than that account.”
Depositors can check the FSCS website (www.fscs.org.uk) to find out if their deposits are covered by the FSCS.
For depositors who have taken out fixed term deposits and who may be affected by the change, the Prudential Regulation Authority (PRA) is consulting on measures that will enable them to take steps to ensure that their deposits remain protected.
The PRA will also be ensuring that British firms take steps to inform depositors of these changes before they come into effect on 1 January 2016.