FSCS temporary deposit protection increased to £1m

mp businessman savings in london©PeskyMonkey

PEOPLE will be better protected if their bank, building society or credit union goes bust with new rules coming into effect from 3 July.

Under current rules any savings greater than £85,000 aren't protected, but the Bank of England is introducing temporary deposit protection of up to £1 million through the Financial Services Compensation Scheme (FSCS).

Previously those receiving large sums of money from house sales or insurance payouts for example, would need to rush to break up deposits into smaller £85,000 chunks for distribution among separate banks.

But under the new rules, 'temporary high deposit' protection lasts for a six-month period and starts from the date money is deposited, or the date the depositor becomes entitled to the funds - whichever is later.

And by December 2016, it should become easier to get savings back; accounts will be automatically switched to a new firm if one fails, allowing nearly continuous access to money.

£85,000 limit still applies

Should they need to claim compensation through the FSCS deposit guarantee scheme, depositors will need to prove money was only held temporarily.

And the new continuous access rules coming into effect at the end of next year won't apply to temporary high deposits - so in most cases it'll take up to seven working days to reclaim money.

If the FSCS is unable to make compensation in that time they may provide interim compensation payments.

For longer-term savings, it's still important to ensure no more than £83,000 is held in any one bank in order to qualify for the FSCS deposit guarantee scheme.

That's because the £85,000 compensation limit, including any accumulated interest, still applies for savings held longer than six months.

Continuity of access

For deposits up to £85,000, continuity of access will mean accounts remain operational on a failed bank's system allowing customers uninterrupted access to their money.

Firms are being given extra time to get ready for this change because they'll need to introduce complex new systems in order for it to work.

The Bank of England say in the event a firm fails, they'd need the facilities to create 'shadow' accounts for covered deposits.

Legal ownership of the deposits in these shadow accounts would then transfer to another firm.

Then ultimately the firm taking over a shadow account would take over access of the depositor's accounts on their own system.

The plan is for this to be automatic, saving the hassle and time delay of claiming money back from the FSCS.

Temporary high balances

Other than being temporary, in order to qualify for higher compensation, balances must be deposited for specific reasons.

These include deposits made from the sale of a house and money deposited in preparation for buying a house.

It also includes various payouts: insurance; personal injury; state benefits; compensation for wrongful dismissal or conviction; redundancy; marriage; civil partnership; divorce; and retirement.

Lastly it includes money deposited in the event of death, so: benefits payable on death; a claim for compensation in respect of a person's death; and a legacy or other distribution from the estate of a deceased person.

People can claim up to £1 million, "per event per authorised entity", so a couple receiving a large deposit after selling their £2 million house for example could each claim back £1 million from the FSCS if their bank were to fail.

And the FSCS aren't capping compensation for cash paid out from personal injury; instead they'll provide unlimited cover.

Information sheet

In the past, information given out by banks about the FSCS deposit guarantee scheme was especially poor.

In particular, those firms operating under multiple trade names could cause confusion, with compensation limits applying on a per firm basis.

From July, banks, building societies and credit unions will need to provide an information sheet about the FSCS deposit guarantee scheme, including any exclusions.

Importantly, they'll need to inform customers of all their trading names so deposits exceeding the limits aren't inadvertently kept within the same firm.

Firms will also need to prove this information is understood by their customers to ensure they're fully informed.

And they must also confirm when a customer's deposits are eligible for the compensation scheme.

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