Safety and security for your money
The continued eurozone sovereign debt problems, starting in Greece and spreading to other European nations, has raised the prospect of another global financial crisis.
When the banks started to collapse the last time, the calls we were getting from investors were not about the performance of their portfolios but about the safety of their money.
A recent record fine levied by the Financial Services Authority against an investment bank for failures to segment client money from business assets highlights just how seriously the UK regulator takes the security of your cash. All regulated financial institutions are subject to strict rules as well as prudential requirements to remain solvent and keep out of financial difficulties.
Investors often focus on what would happen to their cash should the very worst happen to their bank, fund manager or financial product provider. Fortunately, there are several layers of safety nets to prevent catastrophe.
Money on deposit with a UK bank is subject to protection from the Financial Services Compensation Scheme (FSCS).
If the bank were to fail, you would get back £50,000 per person per separately licensed bank. Some banks with different trading styles share the same banking licence, so this can be an important point to check if you are concerned about getting the maximum protection for your cash.
Joint accounts receive £100,000 of protection from the FSCS. Remember however that any debts you have with the same bank, including your mortgage, are deducted from your assets before this deposit protection applies.
It is also important to understand that not every bank available to UK depositors is protected by this compensation scheme.
Some EU banks fall under a ‘passport’ scheme where you have to rely on the protection offered by their own government first, before the surplus of any claim can be applied to the FSCS.
Looking away from the banks, the terms of the FSCS also apply to investment funds and pension plans. You also receive protection of up to £50,000 if the provider of your investment fund goes bust and 90% of the values of most personal pensions are covered under the compensation scheme.
In practice, money invested in collective investment funds is held separately from the assets of the product provider, so if they were to become insolvent your money would remain separate from the money their creditors could call upon. Of course there is still investment risk associated with investment funds, so the actual underlying stocks in which you are invested could go bust and the FSCS does not apply to this.
Saving and investing money in the UK is generally a very safe thing to do from a capital security perspective.
The combination of strict regulation and an established compensation scheme, funded by providers of savings accounts and investments, ensures that investors receive a high degree of protection should the worst happen.
It is important to understand how your money is protected when you save and invest, and what protections would apply if your bank or investment provider got into major financial difficulties.