Bank is wound up and FSCS steps in Southsea Mortgage and Investment Company Ltd folds

16 June 2011

Banks are no longer too big to fail.

A small bank, with around 250 depositors has been wound up after getting into financial difficulties. Savers will be compensated by the FSCS, to a maximum of £85,000 each. 

Banking authorities intervene

The Southsea Mortgage and Investment Company was wound up after intervention by the Financial Services Authority (FSA), acting in conjunction with the Bank of England and HM Treasury under the special resolution regime (SRR). The Havant-based bank, which had retail deposits worth £7.4m, offered loans to property development companies but was caught by a downturn in the property market during 2008-9 and has struggled to recover. 

A Bank of England statement said that 'Southsea no longer satisfied the FSA's threshold conditions for operating as a deposit-taker'. Although several UK banks have faced difficulties in recent years- most notably Northern Rock in September 2007, and more recently LloydsTSB and Royal Bank of Scotland, these were all bailed out by the government, with savers' money being fully guaranteed. The same treatment was afforded UK savers with the Icelandic banks which folded in 2007. 

Financial Services Compensation Scheme (FSCS)     

Unless the government decides a bank is 'too big to fail', savers are formally protected by the Financial Services Compensation Scheme (FSCS). This guarantees to refund up to £85,000 per person, per institution. It is funded by a levy on FSA authorised businesses. The compensation limit for savings was increased from £50,000 in January 2011. 

Until the Southsea Mortgage and Investment Company's collapse, only credit unions had been permitted to fail in this way. The FSA stepped in to protect savers with the Dunfermline Building Society in 2009, but instead of compensating them directly it transferred their accounts to Nationwide and underwrote the cost of this.

FSCS limits

The FSCS is a 'compensation scheme of last resort', designed to reassure savers and investors. A recent speech by the Chancellor, George Osborne, addressed the way that previous bank failure had been met by a blanket guarantee and suggested that this may not be the case from now on. Addressing a City audience at Mansion House, Mr Osborne said: 'I remind everyone with deposits that we have increased the level of deposit insurance to 100% for sums up to £85,000 and we have made clear that there is no implicit taxpayer guarantee for sums above that level.'

Savers looking to enjoy maximum protection need to be mindful of the FSCS limit and spread their money between several institutions. Not all banks are protected independently, however, so it's important to know which banks share a licence and which are fully protected. The Co-operative Bank, Britannia and Smile, for example, share a single licence, so only £85,000 is covered by the FSCS between all three. NatWest and RBS have separate licences, despite being part of the same banking group, so each is covered for up to £85,000. 

It is believed that four depositors with Southsea had more than the £85,000 FSCS limit and will now stand to lose some of their money.

Which? Money Editor James Daley said: "The failure of Southsea is a stark reminder that financial services companies can and do go bust. Anyone that has more than the £85,000 FSCS limit with one licensed institution is unnecessarily putting some of their capital at risk. We recommend that you don't place any more than around £80,000 with any one bank - so that all your capital and any interest owed will be safe in the event that the organisation fails."



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