The protection threshold on savings is set to be restored to £85,000 following the collapse in the value of the pound prompted by the UK’s decision to leave the EU.
British banks and savings providers are currently obliged to offer protection to savers in line with that offered in the EU. Across the continent savers have €100,000 protected if a bank or building society goes bust, with UK customers being refunded by the Financial Services Compensation Scheme (FSCS).
That measure was introduced after the 2008 banking crisis to prevent savers moving their money across borders to chase the highest level of protection.
In July 2015, however, the Bank of England was forced to cut the limit to £75,000 to bring it in line with the EU, following a rise in the value of the pound in the years since the limit was set.
Each non-euro country in the EU is obliged to review its limit every five years, but is allowed to make changes in the light of unforeseen events. Following the fall in the pound over the summer, the Bank of England’s Prudential Regulation Authority (PRA) is consulting on plans to bring the limit back up to £85,000, with effect from 30 January 2017.
“Taking into consideration the developments in financial markets following the UK’s referendum vote to leave the European Union on 23 June 2016, including with respect to the [pound-euro] exchange rate, the PRA considers that a structural shift in the exchange rate has occurred,” the Bank said. “These events were unforeseen when the UK limit was reduced in 2015.”
Savings providers will be given until 30 June 2017 to update their systems and promotional material such as adverts and letters to customers
Danny Cox, chartered financial planner at IFA firm Hargreaves Lansdown, said: “Setting the level of deposit protection for UK savers based on the exchange rate from a foreign currency on a seemingly random date has never made much sense.”
He said the popularity of government-backed National Savings & Investments products showed how important security was to people. “Resetting the FSCS limit back to £85,000 sets a more positive tone for savers,” he added.
The FSCS protects customers of banks, building societies and credit unions that collapse. The near-collapse of Northern Rock in 2007 forced policymakers to take action on deposit protection. At the time, the Labour government moved to guarantee 100% of £35,000 of savings, replacing a tiered system of protection. It was increased to £50,000 during the 2008 banking crisis and £85,000 at the end of 2010.
