Savings protection limit to go back up to £85,000

The Financial Services and Compensation Scheme (FSCS) protection limit is likely to be raised to £85,000 per person following the fall in the value of sterling since the Brexit vote. This proposal is currently under consultation with the Prudential Regulation Authority (PRA) until 16th December 2016. Should this be approved, the Bank of England announced that this change would be enacted by 30th January 2017.

The FSCS is the UK savings guarantee funded by the financial services industry. The FSCS derives from the European Union Deposit Guarantee Schemes Directive, which sets a consistent limit of €100,000 (or the equivalent) across Europe. This directive sets that the limit should be re-calculated at least once every five years while also allowing for “unforeseen events, such as currency fluctuations”. As the pound has fallen more than 10% against the euro since the Brexit vote, the PRA feel that a “structural shift in the exchange rate has occurred” and as a result considers a review necessary.

It has been reported that 500,000 savers will benefit at the proposed new limit of £85,000, protecting around 98% of customers. Since 2001, the FSCS has come to the aid of more than 4.5 million people, paying out more than £26 billion in that time.

Commentary

This move suggests that the Bank of England feel that the devaluation of sterling is likely to be more than a short-term occurrence, which is unsurprising given that it has fallen to a thirty-year low against the dollar. If approved, banks and building societies will have until 30 June 2017 to update their systems and marketing material.

Following Brexit, the UK will need to establish the FSCS independent from the European Union. At that time, the UK will need to decide what level it will grant savers protection, independent of the €100,000 harmonised limit.

We have been since the run on Northern Rock in 2007 a heightened client awareness of the systemic risk within the financial services sector. Indeed it was at that time that the UK government decided to guarantee 100% of savers’ deposits up to an initial limit of £35,000 per person per banking licence to help aid confidence in the sector. While returns prior to 2007 were a key factor for savers, many clients now are focussed on enhancing their depositor protection more than their return.

At Cascade we continue to deliver clients the best rates available within their security and depositor protection requirements. Do let us know if we assist any of your clients further at this time.