With Bradford & Bingley being declared ‘in default’, the government has been able to effect a rescue without (seemingly) involving the taxpayer. However, due to the way the Financial Services Compensation Scheme (FSCS) is funded, only the first £1.8 billion of the scheme’s total £4.03 capacity is attributable to banks. Losses beyond this are paid for by insurers and insurance and financial services intermediaries.

What is more, the FSCS has to pay the Bank of England interest to the tune of £450 million every six months, so if there is any further default, the taxpayer, in the guise of Mr, Mrs and Ms bank account holder, investor and insurance policy holder will end up footing the bill.

Political sleight of hand or what?

And the good news?
Of course, the good news is that depositors are now protected up to £50,000 in any UK bank, so those with relatively modest savings are secure. However, those investing in foreign banks that are not regulated by the Financial Services Authority have no such protection, unless a similar regime exists wherever the bank is located.

Of course, this applies per saver, per institution, so if you have accounts with two institutions that are now part of the same company (and have the sane FSA regulation registration) you will only get one compensation limit of £50,000.

Some people may consider that with several countries offering 100% protection for all deposits in their banks creates an opportunity. However, they might ask themselves two questions: is this a cast iron guarantee or simply an intention; and does it apply to non domiciled investors? (Althought the Icelandic bank system appears to do so, if Icesave goes into default as expected, it now appears that UK savers will not be compensated by the Icelandic system, although our governement has indicated that the FSCS will apply.)

What about business deposits?
The position relating to business deposits is more complicated because the FSCS is primarily intended to protect individual investors so, prime face, the protection does not apply to businesses. However, according to the FSCS website smaller businesses can be compensated, although the definition of businesses which might benefit is not included.

Sole traders might be OK, but if yours is a limited liability company of any size, then any deposits you have with a bank are probably totally unprotected by the FSCS.

Perhaps the governement's new rescue plan will offer better protectoin; but with the possiblity that currency traders will now start speculating against sterling; I wouldn't count on it.

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