Protection for savers to fall by £10,000
The safety net enjoyed by savers in the UK is to be cut back by £10,000, the Bank of England has announced.
Currently, an individual saver's money is protected by the Financial Service Compensation Scheme (FSCS) to the tune of £85,000 should the bank or building society they have their deposit with go bust.
But that level is to be reduced to £75,000 from 1 January 2016, the Bank of England's Prudential Regulation Authority has announced.
The FSCS says savers therefore have, "six months to spread their money around to keep within [the new limit]".
The change comes under an EU ruling (known as the European Union Deposit Guarantee Schemes Directive), the FSCS said, which is making a compensation limit of €100,000 (or local currency equivalent) standard across Europe.
This itself comes as a result of a huge depreciation (16% at the time of writing) of the euro, largely brought about by the crisis in the Eurozone due to the Greek debt situation.
Andrew Tyrie, chairman of the Treasury Committee, blasted the decision, calling it "absurd". He added: "It makes no sense to fix deposit guarantees, which need to be stable to win public confidence and which should be providing certainty and predictability for ordinary savers, to a volatile variable like the exchange rate.
"In this respect, the EU Deposit Guarantee Schemes Directive is defective. It has been designed without adequate consideration for the requirements of those, like the UK, in the EU but outside the Eurozone. By one means or another, the Directive needs to be injected with a dose of common sense."
Rhydian Lewis, founder and chief executive of peer-to-peer specialist RateSetter, said the FSCS was no longer fit for purpose.
"Moving the goalposts in this way with a lower level of protection and higher charges while offering no improvement to the pitiful returns for savers only strengthens the case to refresh the FSCS," he said.
"RateSetter is of the view that the one-size fits all approach of the FSCS is no longer fit for purpose and results in poor value. This is why we have put in place our own bespoke, self-sufficient system - a Provision Fund which has ensured that nobody investing in our market has lost a penny whilst allowing them to enjoy healthy returns."
The FSCS did, however, announce that people with higher balances will be protected up to £1 million for up to six months, giving them a chance to better spread their cash around different institutions to achieve a greater degree of protection. Tyrie welcomed this announcement.
The FSCS also said that large companies and small local authorities (such as parish councils) will now benefit from FSCS protection from 3 July 2015, up to the new limit of £75,000.
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).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.