FSCS protection is being reviewed: how safe are your savings?

The Bank of England (BoE) is considering reforms to its deposit guarantee scheme to better protect savers if a provider goes bust.

The planned overhaul includes boosting the amount protected under the financial services compensation scheme (FSCS) from the current £85,000 limit. 

The scheme has come under increased scrutiny following the recent collapse of Credit Suisse and Silicon Valley Bank, which sparked fears of another 2008-style financial crisis. 

Here, Which? explores the proposals in more detail, why they are needed and what it could mean for your savings.

What is the Financial Services Compensation Scheme (FSCS)?

If a regulated financial firm is no longer trading and can't pay a customer's claim, FSCS can step in to pay compensation. It protects up to £85,000 of savings per individual, per financial institution (not just per bank), and also covers mortgages, insurance and investments.

Although in some circumstances, you could be covered for more than £85,000. A measure to protect temporary high balances (THBs) - where you have money resulting from things like house sales, redundancy pay or inheritances - mean you'll be covered for some types of funds up to £1m for six months.

In the last 12 months, the scheme has helped almost 68,000 people receive the compensation they're due, according to an FSCS spokesperson. Between 1 February to 31 March 2023, the FSCS confirmed that 17 firms went out of business and it is accepting claims against them.

• Find out more: the FSCS explained.

Why do savers need more protection?

During the financial crisis in 2007 and 2008, customers lost hundreds of thousands of pounds as a result of providers such as Northern Rock and Icesave going bust. To prevent that happening again, protection for bank deposits under the FSCS were increased from £32,000 to £85,000.

But now the collapse of Silicon Valley Bank (SVB) and Credit Suisse in March 2023 have sparked fears of another global crash and worries that savers could once again be vulnerable.

BoE Governor Andrew Bailey doesn't believe we are heading for a large-scale financial crisis, but - as the BBC reports - he does have concerns about banks' ability to cope should an SVB-style event happen in the UK. In particular, he questions whether banks hold enough liquidity - or available cash.

Speaking in Washington at a meeting of the International Monetary Fund (IMF) last week, he pointed to the ease with which savers can withdraw or move deposits from online accounts as a particular weak spot for providers. 

Unlike 15 years ago, a bank run - where a large number of customers withdraw their money all at once - could now happen within hours. In the case of SVB, worried savers withdrew $40bn within 24 hours.

'Runs can go further much more quickly,' he said. That's why the BoE has confirmed it is looking into ways to strengthen current protections for savers.

• Find out more: how to find the best savings account

What extra protections could be introduced?

One of the biggest changes under consideration is an increase to the level of protection given to savings deposits. As already mentioned, the limit is currently set at £85,000, but it's far less than the $250,000 (£200,000) protection on deposits offered in the US.

The increased cost to banks, however, is unlikely to be popular with most providers. 'Going further and considering increasing deposit protection limits could have cost implications for the banking sector as a whole. As with all things relating to bank resolution, there is no free lunch,' Bailey said.

The speed with which pay-outs are made is also being reviewed by the BoE. Under the current system, the FSCS aims to pay out covered deposits within seven days of a bank or building society failing. This will usually be paid by cheque, which needs to be banked and cleared first, meaning there is usually a period where customers don't have access to their funds.

In a statement published on Tuesday (18 April), the BoE is proposing to speed up the process by using electronic transfers instead of cheques as the main pay-out method.

How to keep your savings safe

Today, smaller, challenger banks often give the best rates. But many people may feel nervous about saving with a bank they've heard little about. 

If you're worried, there are some checks you can make to ensure your money is protected. A good starting point, of course, is to find out whether they are covered by the FSCS. 

While challenger banks have to abide by the same rules and regulations as other banks, not all of them are FSCS protected. For example, while the likes of Kroo, Starling and Monzo have banking licences in the UK, some companies such as Revolut operate under electronic or e-money licences instead. This means that although money must be ring-fenced in a segregated account, you don't get direct protection from the FSCS.

Before opening a new account, you can use our savings tool to search for the bank or building society. Not only will it tell you who they own, or are owned by, but it will provide information how much protection you'll get under that brand. This should give you the reassurance you need to invest your money in the right company, safe in the knowledge that you're fully protected should the worst happen.

It's also a good idea to check what features the provider offers to ensure your banking app is as secure as possible, minimising the impact if your phone gets stolen. For example, many digital banks have location-based protections to prevent fraudulent payments where the location of the card and the app don't match. Others use biometric technology such as your voice and face to secure the app.

• Find out more: how safe is online banking?