Back in 2008 we saw a number of banks collapse and others bailed out by the taxpayer. This highlighted that savers needed to make sure their money was protected if the worst ever happened again.
Broadly speaking, bank savings are covered for up to £85,000 through the Financial Services Compensation Scheme (FSCS). The FSCS protects 100% of the first £85,000 per financial institution, not per account, and if your bank were to fail, the FSCS aims to get any savings up to this amount back to you within seven working days.
While that sounds simple it is actually more complex than that. Some banks are part of groups and this means that any protection is split between them. Other banks offer savings accounts outside the UK so are not protected.
With the word recession being mentioned once again and inflation running at over 11%, many savers have turned to challenger banks and e-money services such as Revolut to obtain a better rate of return without having to brave the stock-market.
But what happens to your money if these services suffer the same fate as some banks in 2008?
Revolut, for instance, does not qualify for FSCS protection because it is considered to be an e-money institution, authorised under the UK Electronic Money Regulations, and FSCS protection does not apply to the services they provide.
Instead, they protect your money through “safeguarding”, and it is important to understand how this works. A safeguarding account aims to secure clients’ funds through segregation by blocking any third-party access. Sometimes, less commonly, it may protect the money with an insurance policy instead. Your money must stay in these accounts or investments until you spend it. Therefore, although there is an element of protection, your funds are still at an increased risk of being lost through the default of Revolut or their insurance company.
Although the risk of these scenarios is low, our advice would be to keep any large cash holdings in NS&I accounts, including Premium Bonds. Although the odds of winning £1million tax free is a good enough incentive, the main benefit is that any money within these accounts is covered to 100% of the value by the UK Government.
