Money Talks: You can’t bank on anything
QUESTION: I have read recently about various banks and building societies having to merge because of the current financial problems. How safe are my deposits?
ANSWER: It is hard to believe that we are 12 months on since the Northern Rock debacle, when the government had to step in and effectively nationalise the building society.
We can remember as if it were yesterday, the initial news reports that highlighted the problems at Northern Rock, followed by the scenes of people standing outside the premises, waiting for them to open so they could withdraw their deposits.
In America, we have recently witnessed a similar rescue as the government were forced into nationalising two mortgage giants, Freddie Mac and Fanny Mae.
These two organisations accounted for a substantial part of America’s overall mortgage lending and if the government had failed to step in, the repercussions would not bear thinking about.
As well as nationalisations, we have also seen some merging activity in the financial sector. Alliance and Leicester, one of the main high street building societies are being taken over by Santander, the company that bought out Abbey a few years ago.
Nationwide, one of our largest building societies announced recently it is to acquire two small mutual societies, The Derbyshire and The Cheshire.
All of this may sound as if we have stepped back 20 years, when we all received those windfall shares, as each of our building societies went public.
However, this time around the economy is in a different state and there are no such windfalls, people are just happy that they are not going to lose money. But with all of this turmoil, and another big American Bank, Lehman Brothers, filing for bankruptcy, people are now questioning how safe their money on deposit is? We used to say that cash in a bank was as safe as houses, but we all know what has happened to the property market recently and we would hope that our deposits are safer than houses now.
The ultimate backdrop of security comes in the form of the Financial Services Compensation Scheme (FSCS). This statutory fund will pay out in the event of an authorised financial services fund going bust.
It is only when the firm goes out of business and ceases trading that the FSCS will apply. This fund will cover a wide range of institutions including credit unions, life assurance companies, firms advising on mortgages and of course bank and building societies.
The compensation limits are set by the Financial Services Authority (FSA) and for something like a bank or building society this is set at £35,000.
This limit was increased slightly in the wake of Northern Rock, but many argue it is still set at a pitifully low amount. This autumn, the FSA is reviewing these limits so we may see a further increase.
The important thing to bear in mind, however, is that this limit for deposits is in respect of each separately authorised deposit taking organisation which is registered with the FSA).
So for example, if you have a number of different accounts with the same bank or building society you will only be covered once.
Similarly if you have a joint bank account with the same bank then you are only eligible for one pay out.
Finally be aware that several banks offer accounts with different brands, and if something should happen, any compensation would be based on the provider, not the different accounts that you hold.
So check the accounts carefully and if you are concerned the ultimate security is to spread your deposits around different building societies and banks in small amounts.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact firstname.lastname@example.org or (028) 9022-1010