Are building societies safer than banks?
The ongoing banking crisis has highlighted how quickly (and seemingly, easily) a big corporate can go belly-up – leaving savers and depositors at risk of losing their money, at least temporarily.
So, choosing the safest home for your money has become more important than ever. The Financial Services Compensation Scheme (FSCS) covers individuals up to £50,000 per bank, and judging by the government’s response to the collapse of Bradford & Bingley and three Icelandic-owned banks, the Treasury is likely to cover any additional amount.
But, there are gaps in the protection the FSCS offers, which savvy savers need to be aware of if they want to cover their backs.
The most important thing to be aware of is that the FSCS protection limit is per customer per bank. So, if you have more than one savings account with the same firm, then your total balance will be taken into account when compensation is being issued.
While it’s relatively simple to have more than one account with two or even three different banks, this is just the tip of the iceberg. In the UK, many banks – while having their own, individual brands – are actually part of the same group and in some cases are regulated by the Financial Services Authority (FSA) as one bank.
For example, Bank of Scotland, Intelligent Finance, Halifax and Birmingham Midshires/BM Solutions are all regulated as HBOS – so, despite technically being four different banks, in the eyes of the FSCS they count as just one. Other saving brands regulated by HBOS include SAGA and AA Financial Services.
Because four HBOS brands also offer mortgages, the plot thickens further. The FSCS, when calculating compensation, subtracts any debt owed to the institutions – considering many people’s mortgages are greater than their savings, this could be a real problem.
You can find out how your bank is regulated by checking the FSA register.
However, this is not the easiest website to use - to make it easier for you, Moneywise has compiled a list of UK saving banks and building soceties and how they are authourised.
According to Fairinvestment.co.uk, an independent financial website, the fact that current compensation laws limit protection to “per bank” rather than “per brand” is starting to hit home with consumers, who are increasingly looking to spread their money around in order to maximise their protection.
And the website says it has come up with a possible solution – opting for a building society account rather than a bank’s. With a few exceptions, building societies are unlikely to be part of a bigger financial group and so have an exclusive FSA registration number.
In addition, the FSA has now introduced a new rule that offers extra deposit protection for building society savers when mergers occur. Between 1 December 2008 and September 2009, building societies that merge will be able to keep their separate compensation limits.
Unlike banks, building societies that merge are legally required to operate as a single entity with just one FSA license. The Financial Services Compensation Scheme rules that the £50,000 deposit protection it offers only covers customers per bank (i.e. per FSA license).
Sharon Bratley, chartered financial planner at Fairinvestment.co.uk, says: "Building society savings accounts may offer more security for large depositors as they tend to be single entities as building societies are owned by the members rather than shareholders.
"For this reason, building societies may be safer for savers with more than £50,000 to invest.“
Because most building societies also offer mortgages, Bratley reminds savers not to bank with their mortgage provider.
“These drawbacks are worth keeping in mind when choosing a savings provider, especially given the current economic climate. If you have a loan with one provider it may be worth opening a savings account with a separate financial institution to avoid being caught out."
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 Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
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.