How safe is your bank?

Saving interest reached a new low in December 2015, with the average rate received on an instant-access account dropping below 0.5% for the first time on record, according to figures from the Bank of England earlier this month.

Mainstream banks are under no pressure to offer decent rates, which the Financial Conduct Authority (FCA) all but confirmed in December when it published a survey that showed two-thirds of a group of 32 mainstream banks in the UK were ‘rewarding’ some loyal customers with interest rates of 0.1% or less in December. First Direct and HSBC were found to be paying no interest at all on some accounts.


But a series of challenger banks, including RCI, Turkish Bank UK and Shawbrook, as well as a mainstay of building societies, are fighting the tide of falling savings rates.

Relatively high returns (for savings accounts anyway) can be tempting, but rates that are much higher than average should sound an alarm bell, and any account isn’t worth touching unless you can trust the bank, building society or credit union to be financially strong enough to protect your savings in difficult times.

Moneywise editor, Moira O’Neill, was unfortunate enough to discover this for herself in the wake of the financial crash when her savings, which had been put in a high-interest account with Icelandic bank IceSave, were almost lost when the country bore the brunt of the subprime lending collapse.

“In October 2008, I came back from a two-week holiday to hear that the banking meltdown had occurred while I was away, ” she says.

“Most worrying for me was that the Icelandic banks had begun to fold. Oh no, I thought, I’d better get my family’s emergency cash savings pot out of Icesave. Too late, Icesave’s parent bank, Landsbanki, had already gone into receivership.


“I was one of 300,000 UK Icesave customers, who had chosen the bank for its best-buy interest rates. Fortunately, the UK government bailed us out and I received my money back in full via the Financial Services Compensation Scheme (FSCS) in December 2008. However, it was not an experience that I would like to repeat and I have been very cautious about the safety of my savings ever since.”

The IceSave example, which almost cost UK savers £4.5 billion, just goes to show how guarantees are only as strong as the institutions giving them. Technically, the Icelandic government had guaranteed the deposits, but ultimately it took months for savers in the UK to get their money back, and the legal battle between the UK and Iceland only concluded in 2015.


How your money is protected

If you deposit up to £75,000 in a UK bank, building society or credit union, the FSCS effectively insures you against the bank going bust. It’s run by the FCA, and the ‘policy’ also applies to any savings or money in your current account, including interest, up to the £75,000 cap.

The protection applies to each bank you have an account with, not to each person, or to each bank account. That means if you have more than £75,000, you can split savings between two or more banks to make sure it’s all covered. For couples, it also means they can put £75,000 each into a joint account and the full £150,000 will be protected.

But if an individual splits £100,000 between two accounts in the same bank, or even two brands operating on the same banking licence, say RBS and NatWest, or Yorkshire Bank and Clydesdale Bank, then £25,000 would fall outside the protection of the FSCS.

Higher balances

As of July 2015, there’s an extra layer of protection for temporarily high balances of up to £1 million, but only for six months at most. It’s been introduced by all European banks to cover large amounts of cash you might have in your account for a few days or weeks because of a property sale, wedding, redundancy payment, inheritance, or insurance pay out.

Compensation for personal injuries are protected for any amount, even over the £1 million limit.

European and offshore banks

The UK’s FSCS is actually part of a wider European framework, so you have similar protection if your money is in another European Bank, such as Fidor Bank (Germany) or RCI (France).

However, with these institutions you’re protected in the local currency up to £100,000, instead of £75,000, which could be better or worse depending on the strength of the pound. At the moment, it’s about £78,000.

If a bank in another EU country did fail, your claim is against the regulator of that country, and some countries may be less willing or able to pay than others. As a UK saver, your claim would be handled by the FSCS, though the money is actually guaranteed by the corresponding EU deposit protection scheme.

That should avoid the hassle of claiming in a foreign language – though, in theory, any compensation through any European scheme should kick in automatically without any need to actively claim.

More fundamentally, you’re relying on the strength of the bank and the country’s regulator to ensure that there’s no problem in the first place.

Banking failure isn’t the only potential risk for your savings – you’re more likely to be a victim of fraud than a bank is to collapse, for example.

It’s impossible to protect yourself completely from fraud, but finding a bank you trust to sort it out, with strong protections in the first place can make it far less likely.

Challenger banks that have FSCS protection


Shared licence? No
Post, Phone, Online

Doesn’t currently offer the best rates, but is highly rated by customers for good service. It’s a UK bank that focuses on small and medium-sized enterprises (SMEs), and has steadily grown since its launch in 2009, listing on the FTSE and reaching £5 billion deposits in 2015.

Bank of Punjab
Shared licence? No
Branch, post

This UK licensed and regulated subsidiary of India’s third largest bank has operated in the UK since 2006. Some accounts are available by post, but top deals are sometimes branch-only, available in its seven branches across London and the Midlands.

Charter Savings Bank
Shared licence? Yes, with Precise Mortgages

Deposits fund buy-to-let mortgages, which are twice as likely to default than standard mortgages, according to Bank of England claims in December. Nevertheless, it’s fully licenced by the FCA, so savings are covered by the FSCS. Currently strong for notice accounts.

Danske Bank
Shared licence? No
Online, phone

Danske is Denmark’s largest bank, and it was deemed robust in the latest round of European stress tests. UK branches are regulated by the FCA, so savings are covered by the FSCS. The rates are generally poor, but its 40-day notice Isa pays relatively well on balances over £30,000 – if you can straddle subscriptions over two years.

Secure Trust Bank
Shared licence? No
Online only

Offers good rates, but at the moment it just has a single bond for sale – a seven-year fixed-rate account paying 3.13%. It has operated in the UK for more than 60 years. And although it is the only deposit taker on its banking licence, it arranges motor finance and small subprime loans (up to £15,000 at 74.9% APR representative) through its other brands.

Shawbrook Bank
Shared licence? No
Online only

Shawbrook launched in the UK in 2006, to cater for SMEs. It has since lent more than £2.7 billion, and is on the FTSE 250. Although its shares recently fell to a historic low, Credit Suisse tipped it to ‘outperform’ in a note that commended the bank’s business model and credit risks, which suggests a well-run bank.

Turkish Bank UK
Shared licence? No

Operating and licenced in the UK for 40 years, it pays 2.75% on three- year fixed-rate bonds. Its branches are just in London, though it offers postal accounts.

Challenger banks that have European protection


AgriBank (Maltese compensation scheme)
Shared licence? No
Online only

This bank primarily lends savers’ deposits to UK farmers to buy equipment. It’s a long-standing best-buy rate for five-year savings accounts, but there’s no early exit. 

Guaranteed by the Maltese government, which has to be said is quite small compared to its banking sector. Watch out for the 5% co-invest bonds, as these aren’t covered by any compensation scheme at all.

Fidor Bank (German deposit scheme)
Shared licence? No
Online only

Launched in 2010, and still relatively small, Fidor aspires to be a social media bank, with lots of online discussions and a current account where the interest rate can double (to just 0.5% admittedly) if the company grows popular on Facebook. The rates aren’t bad either – 2.75% on its three-year bond.

Ikano Bank (Swedish deposit insurance Scheme)
Shared licence? No
Online only

Ikano has been operating in the UK for several years as the bank behind store cards for the likes of New Look and Ikea. Privately owned by the Swedish flat-pack dynasty, it pays consistently good rates on its bonds, but never the best on the market.

RCI (French compensation scheme)
Shared licence? No
Online only

Renault’s banking arm. Deposits protected up to €100,000. Frequently at the top of the best- buy tables for one-year bonds and easy-access accounts.

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