Jane Dotson
Bank deposits in the UK are insured by the Financial Services Compensation Scheme (FSCS), which is the UK's Deposit Guarantee Scheme. The FSCS is a government-established institution that protects customers of failed financial services firms and guarantees the safety of their deposits. The scheme covers up to £85,000 per person across all accounts held within a bank or banking group. The FSCS aims to reimburse customers within seven working days and without any necessary action from the customer. While the presence of deposit insurance provides assurance that funds are protected, it does not always prevent bank runs, as seen in the case of Northern Rock in 2007-2008.
| Characteristics | Values |
|---|---|
| Deposit insurance in the UK | Covered up to £85,000 per depositor per institution by the Financial Services Compensation Scheme (FSCS) |
| FSCS protection criteria | The bank or building society must be authorised by the UK |
| FSCS reimbursement timing | Aims to pay back customers' money within seven working days in most cases; can take up to three months for temporary high balance claims and accounts with non-obvious beneficial owners |
| FSCS eligibility determination | Depends on how the funds are held with the bank; FSCS can't confirm eligibility until the point of firm failure |
| Joint accounts | Covered up to £170,000 |
| Context | Deposit insurance is a measure to protect bank depositors from losses due to a bank's inability to pay its debts; it promotes financial stability and prevents bank runs |
| Historical context | The UK government has intervened to rescue banks during financial crises, including the secondary banking crisis of 1973-1975 and the 2008-2009 financial crisis |
| International context | Many countries have deposit insurance schemes, with variations in coverage limits and structures; Europe-wide deposit insurance has been proposed |
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What You'll Learn
The UK's Financial Services Compensation Scheme (FSCS)
The Financial Services Compensation Scheme (FSCS) is the UK's statutory compensation scheme for customers of authorised financial services firms. It was set up by parliament under the Financial Services and Markets Act 2000 and is funded by the financial services industry. The FSCS is an independent organisation with its own board of directors, although the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) oversee its operations. The FCA and PRA also make the rules relating to the FSCS.
The FSCS can pay compensation to customers of authorised financial services firms when they fail. It covers deposits, insurance, debt management, funeral plans, investments, pensions, mortgages, and payment protection insurance to varying amounts. The FSCS can pay compensation of up to £85,000 per person, per authorised firm, across all accounts held within the bank/banking group. If the deposits are in a joint account, the total protection doubles to £170,000. The FSCS aims to pay customers their money back as soon as possible, usually within seven working days. However, more complex claims may take longer, with some reimbursements taking up to three months.
The FSCS is not the only deposit insurance scheme in the world. Similar schemes exist in Switzerland, Turkey, Ukraine, Brazil, South Africa, and many other countries. Deposit insurance is a measure implemented to protect bank depositors from losses caused by a bank's inability to pay its debts. These schemes promote financial stability and prevent bank runs, where depositors rush to withdraw their cash when a bank's financial strength is called into question.
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FSCS compensation limits
The Financial Services Compensation Scheme (FSCS) is the UK's statutory compensation scheme for customers of UK-authorised financial services firms. The FSCS can pay compensation to customers of authorised financial services firms when they fail. The rules of the FSCS are made by the Financial Conduct Authority (FCA) and are contained in its handbook. The FSCS is an operationally independent body, set up under the Financial Services and Markets Act 2000 and funded by a levy on authorised financial services firms. It is free for consumers to use.
The FSCS compensation limit is £85,000 per eligible person, per bank, building society or credit union. Joint accounts are eligible for FSCS protection up to the same limit of £85,000 per eligible person. This means that anyone who has deposits in more than one account under a single brand, or multiple accounts under different brands owned by a single firm, is protected up to a total of £85,000 across all these accounts. If a customer holds deposits in a bank via a wealth management company or online platform, their eligibility for deposit protection would be dependent on how the funds are held with the bank.
The FSCS also protects certain qualifying temporary high balances up to £1 million for six months from when the amount was first deposited. The FSCS covers deposits, insurance, debt management, funeral plans, insurance, investments, pensions, mortgages and payment protection insurance to varying amounts. For example, if you've received bad advice in relation to your pension, you could be eligible to claim compensation of up to £50,000 per eligible person, per firm.
The Prudential Regulation Authority (PRA) has proposed raising the deposit protection limit from £85,000 to £110,000. This proposal takes into account inflation since the limit was last changed in 2017 and is designed to give consumers confidence that their money is safe if their bank, building society or credit union fails.
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FSCS eligibility
The Financial Services Compensation Scheme (FSCS) protects eligible deposits held in UK-authorised banks, building societies, and credit unions (including in Northern Ireland). The FSCS is a completely independent and free service set up by Parliament and funded by the financial services industry.
FSCS protection applies to each beneficiary across all accounts held in the bank or banking group, not per account. This includes money held in the beneficiary's name or where they are listed as the beneficial owner (e.g., money held on their behalf in a client account). If a beneficiary has their own account within the same bank or banking group, they are protected up to £85,000 in total.
FSCS protection is not dependent on the customer living in the UK, but the bank or building society must be authorised by the UK. The FSCS will automatically pay back customers' money within seven working days in most cases, and up to three months in certain situations.
To check if your money is protected, you can use the FSCS's protection checker by providing the name of your bank, building society, or credit union, the amount of money saved, and the type of account. You can also refer to the Financial Services Register or ask your bank directly.
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The role of the state in deposit insurance
The state plays a crucial role in deposit insurance, which is a measure implemented to protect bank depositors from losses in the event of a bank's failure or inability to pay its debts. Deposit insurance is designed to promote financial stability and prevent bank runs, where depositors rush to withdraw their funds due to concerns about the bank's financial health.
In the context of the United Kingdom, the Financial Services Compensation Scheme (FSCS) serves as the deposit insurer. It is set up by Parliament and funded by the financial services industry, offering a free and independent service. The FSCS protects up to £85,000 per depositor across all accounts within a bank or banking group. This includes situations where an individual is listed as the beneficial owner, such as money held in a client account. The FSCS aims to reimburse customers within seven working days, prioritising the swift return of funds.
The state's role in deposit insurance is significant because it provides a guarantee that depositors' funds are secure. During financial crises, the state may intervene to prevent the loss of depositors' money. For example, during the 2008 financial crisis, the UK government stepped in to rescue major banks like the Royal Bank of Scotland and Lloyd's TSB, ensuring that depositors' funds remained intact.
While some have proposed alternatives to state intervention, such as commercial insurance principles where banks pay premiums based on their risks, the state remains the primary guarantor of private bank deposits. This is because the cost of risk-based insurance would make deposit insurance unaffordable for most banks. The state, therefore, acts as the insurer of last resort, safeguarding depositors' funds and maintaining confidence in the banking system.
In conclusion, the state's role in deposit insurance is vital to protecting depositors, preventing bank runs, and ensuring financial stability. Through government-backed schemes like the FSCS in the UK, depositors can have peace of mind that their funds are secure up to a certain limit. The state's intervention during financial crises further reinforces its commitment to safeguarding depositors' interests.
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The impact of deposit insurance on bank runs
Deposit insurance is a measure implemented in many countries to protect bank depositors, either in full or in part, from losses caused by a bank's inability to pay its debts. Banks are allowed and encouraged to lend or invest most of the money deposited with them instead of safekeeping the full amounts. This makes banks prone to bank runs, where depositors seek to withdraw funds quickly ahead of a possible bank insolvency.
Preventing Bank Runs
Deposit insurance guarantees that depositors will get their money back should their bank fail. This assurance brings confidence to the market and reduces the likelihood of depositors rushing to withdraw their funds due to fears about a bank's financial health. The presence of deposit insurance can thus act as a safety net, preventing bank runs and promoting financial stability.
Moral Hazard and Excessive Risk-Taking
While deposit insurance prevents bank runs, it also reduces the incentives for depositors to monitor the banks they invest in. Depositors may become less vigilant and more willing to tolerate excessive risk-taking by banks. This moral hazard problem can lead to unintended consequences, as banks may be encouraged to engage in riskier behaviour, knowing that their depositors' funds are guaranteed.
Stability of the Banking System
Deposit insurance contributes to a more stable banking environment by reducing the probability of bank failures. The assurance of deposit insurance can prevent panic-driven withdrawals and maintain confidence in the banking system. However, the impact of deposit insurance on stability is context-specific and depends on how well it is designed and administered.
Cost Implications
Providing deposit insurance comes at a cost to governments, typically funded through taxation. While deposit insurance may protect against bank runs, it can also result in higher costs when banks fail due to increased coverage limits. There is a trade-off between reducing the likelihood of bank failures and the potential for higher costs when failures occur.
In summary, deposit insurance has a significant impact on preventing bank runs and promoting depositor confidence. However, it also introduces moral hazard issues and may encourage excessive risk-taking by banks. The optimal design of deposit insurance coverage is crucial to balancing the benefits of stability with the potential costs and negative incentives associated with excessive risk-taking.
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Frequently asked questions
Yes. The Financial Services Compensation Scheme (FSCS) protects up to £85,000 in total across all accounts held within a bank or banking group.
The FSCS will only be able to compensate you up to the £85,000 limit. The remaining amount may be lost if the bank fails and is unable to pay its debts.
The FSCS will automatically pay back customers' money within seven working days in most cases. The FSCS aims to get customers their money back as soon as possible, and in some cases, it may take up to three months.
