Byline: IAN LOWES
BANKS - love them or loathe them, we can't live without them. The fact is that banks are integral to the way we do business and live our daily lives.
So what do we do when something that is constant and stable appears like it isn't? Since the financial crisis began and after the failure of Lehman Brothers almost resulted in the collapse of the banking sector, the banking system has been under the spotlight.
The bailouts of the likes of RBS, Lloyds TSB, HBOS and Northern Rock by the Government in late 2008 arose out of the need to support these institutions to allow them to continue to provide the services we are used to. This process is continuing today with the restructuring of the European banking system, which has been seen in the recent injection of EUR100bn into Spain's banking sector.
As a result of the ongoing crisis, many banks around the globe have had their credit ratings - the evaluation of the ability of the particular institution to repay its debts - downgraded, meaning in the eyes of the ratings agencies there is now a greater chance that they might default on their debts.
This has understandably made investors and savers nervous about where it is safe to place their hard-earned cash.
So what protection do we have if a bank goes bust? In the UK, to provide savers and investors with some degree of protection over and above that provided by law, the Government introduced the Financial Services Compensation Scheme (FSCS).
The FSCS is an independent body set up under the Financial Services & Markets Act 2000 and is the compensation vehicle of last resort for customers of firms authorised by the Financial Services Authority, which includes the banks. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its depositors.
As such, it can provide customers with extra peace of mind that their money is safe when they save it in, for example, a bank or building society account.
However, there are limits to what can be claimed. For money placed in, for example, deposit accounts - which may include a current account, savings account, cash Isa or savings bond - with the same authorised bank or building society, the limit is pounds 85,000 per person per financial institution. If money is held in a joint account, each holder can claim up to pounds 85,000; pounds 170,000 altogether.
There have been a lot of consolidation and takeovers in the banking sector over the past 10 years or so. It is crucial that savers check which institutions they have their cash with and who now owns them. Some banks count as one financial institution - Halifax, Bank of Scotland, Intelligent Finance, AA and Sage, for instance, all share one banking licence. If a saver had their savings spread across these institutions only pounds 85,000 would be covered by the FSCS. Similarly, the Yorkshire Building Society now owns Norwich and Peterborough Building Society and also bought the savings accounts from internet bank Egg.* However, the FSCS does not provide compensation for investors taking investment risk with their money if investments do not perform well.
The FSCS is funded by the financial services industry, including independent financial advisers, on a pay-as-you-go basis. …