At the start of 2016, the limit for deposit protection under the Financial Services Compensation Scheme (FSCS) was cut by £10,000 to £75,000. By the end of January 2017. It is almost certain to be back at £85,000. The reason embraces two of this referendum year’s most contentious items: EU law and the euro.
The European Deposit Guarantee Schemes Directive (EDGSD) sets a minimum level of €100,000 or the local currency equivalent on deposit protection. For non- Eurozone EU members, such as the UK (for the time being), the Directive requires a reassessment of their local currency cover level every five years, taking account of prevailing exchange rates. The UK’s last review was inSummer 2015 when, as the graph shows, £1 would buy a little over €1.40. The previous limit had been based on a much lower exchange rate, hence the £10,000 cut that, thanks to transitional measures, mainly took effect in January 2016.
To put it mildly, a lot has happened since. One of the main events – the vote for Brexit – prompted a sharp fall in the pound against almost every currency. The drop against the euro was from around €1.30 on 23 June to just over €1.10 in October, although sterling has since recovered to nearly half its lost ground. Fortunately, the EDGSD was designed to cater for such currency volatility. In addition to the standard quinquennial review period, the Directive requires an adjustment to be made following “unforeseen events" (!)
In November, the Bank of England issued a consultation paper proposing to send the cover level back up to £85,000. To a large degree, the consultation is a formality as there will be no opposition to the increase, due to take effect on 30 January 2017. It will make life a little easier for those with large deposits – a £250,000 deposit will need to be spread across three banks rather than four to gain full protection.
This is a welcome, if minor move. Depositor protection still matters - witness the efforts underway at the time of writing to find an institution to take over the struggling Manchester Building Society, which has some members with £75,000+ deposits.
This article is intended for information purposes only and should not be considered to be a recommendation. This article is based on our understanding of current and draft pension and tax rules as at the date of this article. Please note that tax and pension rules are subject to change; if you are at all uncertain about the suitability of any option for your circumstances we strongly suggest you seek regulated personal financial advice. You should not take action solely on the basis of this article without seeking advice specific to your circumstances. Please get in touch to find out more.