News that some savers in Cyprus have lost large amounts of money that they thought was safe in bank accounts unsurprisingly caused investors in the UK to wonder how safe their investments are. So how safe is your money in ISAs and brokerage accounts?
Systemic Collapse
Concern has been heightened because, in the unlikely event of a systemic collapse of the banking system, the Bank of England has proposed that there should be a ‘bail-in’ of shareholders and unsecured creditors.
This was made explicit in a document “Resolving Globally Active, Systemically Important Financial Institutions” published jointly by the US Federal Deposit Insurance Corporation and the Bank of England back in December 2012. It concluded:
“In both the U.S. and the U.K., legislative reforms already made or planned in response to the financial crisis provide new powers for resolving failed or failing G-SIFIs [Global systemically important financial institutions]. The FDIC and the Bank of England have developed resolution strategies that take control of the failed company at the top of the group, impose losses on shareholders and unsecured creditors —not on taxpayers— and remove top management and hold them accountable for their actions.”
Good news comes from the Financial Services Compensation Scheme (FSCS), which is the UK's statutory fund of last resort for customers of financial services firms. Official policy is that even in this ‘worst case’ scenario, “insured depositors”—meaning people covered by the FSCS limits below—would still be covered by the current FSCS protection.
What Level of Protection?
If a UK-regulated bank fails and doesn’t have the money to repay your cash deposit, the simple rule is that up to £85,000 per person per institution is fully protected by the UK's Financial Services Compensation Scheme.
If you have more than one account with the same banking or saving brand, or several brands that come under the same authorisation, the total amount covered by the FSCS is still £85,000 per person. (Visit the Financial Conduct Authority website to see whether your bank uses more than one brand name.)
So if you had £80,000 deposited in HSBC and say £30,000 deposited with First Direct, you’d only be covered for one lot of £85,000 because they share the same authorisation (thus, you’d lose £25,000 in the unlikely event of a failure of HSBC).
Investments
If you put money in stocks and shares or funds that invest in them, then you’ve officially got a ‘risk-based’ investment rather than savings and a totally different FSCS protection scheme applies.
According to the FSCS, the compensation rules are as follows:
- Stocks and shares ISAs would come under investments, so 100% of the first £50,000 would be protected per banking authorisation.
- Investments in funds held within a brokerage account (not cash ISAs) would fall under the investment category. The compensation limits for which are £50,000 per authorised firm.
- Cash ISAs are protected under deposits up to £85,000 (£170,000 for joint accounts).
- Nominee accounts would also be covered under deposits up to £85,000.
A spokesperson for one broker, TD Direct Investing, confirmed: “Stock held within a client's brokerage account, ISA/SIPP etc. is placed in safe custody with a nominee company that has been established in accordance with FCA rules. This means that the stock the client places in their nominee account is 'ring-fenced' and cannot be accessed by TD Direct Investing in the unlikely event that it ever experienced financial problems.”
They added: “Stock held in our client's brokerage account is also covered by the FSCS protected investment business scheme, which provides cover to a maximum of £50,000 per client if a claim need be made to the FSCS.”
Certainly, investors should sleep more easily provided they ensure that they meet the criteria for protection under the FSCS scheme and don’t place investments/deposits above the specified level with any single financial institution. If you’re in any doubt about whether you are covered, contact the institution directly and you may like to get additional reassurance from an Independent Financial Adviser.
