Is my money safe with an Icelandic bank?
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Following the run on Northern Rock last year, some savers have been anxious about how safe their money is.
For customers of Icelandic banks that operate in the UK, such fears have been heightened by a recent report suggesting that the banking sector in Iceland is on shaky ground.
However, the banks say savers have nothing to worry about as their cash is protected. But just how safe is it to keep your savings with an Icelandic bank?
What is the concern?
Last month Moody’s, a credit-rating agency, described Iceland’s banks as financially “fragile”. This sparked concern that, if any Icelandic bank operating in the UK fell into difficulty in the same way that Northern Rock did last September, then savers’ deposits could be at risk.
There are currently two big Icelandic players in the UK savings market – Landsbanki and Kaupthing Bank.
Landsbanki launched a savings account provider called Icesave into the UK in 2006. It currently has around £5 billion in saver deposits and offers several headline grabbing deals.
Iceland’s largest bank, Kaupthing Bank, has been in the UK since 2005 but only launched a savings account earlier this month through its Edge brand.
Is my money protected?
It’s hard to know for sure whether Icelandic banks are at risk of falling into difficulty in the same way that Northern Rock did. Although Moody’s said they were fragile it also added that the health of Iceland’s public finances meant its government would be able to “fend off a liquidity crisis".
But even if an Icelandic bank were to fail, then savers with up to £35,000 in an Icesave or a Kaupthing Edge account would be protected against any losses in the same way that they would be if their nest eggs were in a British bank.
This is because these banks are covered by an Icelandic deposit guarantee and the UK equivalent, the Financial Service Compensation Scheme (FSCS). The first €20,887 (around £15,600) of savers’ money is protected by the Icelandic scheme, while the remaining amount up to £35,000 is covered by the FSCS.
A spokeswoman for Kaupthing Edge says that if customers did need to seek compensation then they would only have to deal with the FSCS, which would liaise with the Icelandic department on their behalf.
More than £35,000?
If any bank in the UK fails then savers would only face losing their money if they had more than £35,000 in an account.
One of the concerns about Icesave customers is that their average deposit is £38,000. The bank says this has shifted recently following the launch of a fixed-rate account and an ISA. And it also claims that because the chances of it failing are so slim there is no harm in savers keeping more than £35,000 in any single account.
However, if you are concerned about the risk to your money then it is generally not advisable to keep all your eggs in one basket.
If you do have more than £35,000 to save and want to ensure all your funds are covered by a deposit-protection scheme then you should consider opening another competitive account and transferring anything over £35,000 across.
Make sure that you monitor your accounts to ensure the amount of cash in them never exceeds the £35,000 limit.
However, it is worth remembering that deposit-protection schemes are a last resort for savers.
Mark Sismey-Durrant, managing director of Icesave, says: “An Icelandic bank failing is completely hypothetical – Landsbanki made €520 million profit last year and is in a strong financial position. There is no reason for depositors to be concerned.”
Or you can read our daily round-up of the most competitive savings accounts on the market.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).