100 days until reduction in deposit protection for savings

As the countdown begins on changes to the Financial Services Compensation Scheme we take a look at what the changes mean for you and what you can do about it…

Don’t you just hate it when you’re doing some shopping, and find that one of your favourite products has mysteriously shrunk in size? What before weighed an appetising 85 grams now only weighs 75? This is similar to what is about to happen to the Financial Services Compensation Scheme (FSCS). The Scheme offers protection for savers and investors if their account provider, such as a bank, building society or credit union goes bust. It offers protection of up to £85,000 of savings per individual, per financial institution.

However, from 1 January 2016 the level of protection in the UK will fall to £75,000 - the first time in the history of the FSCS that the level of protection for consumers has decreased. A movement in exchange rates is the reason for the change - the limit is set across the European Economic Area at a level of €100,000 and reassessed every five years. While on this occasion, the limit was maintained at €100,000, changes in currency markets mean that when converted to pounds, the UK equivalent limit will reduce from £85,000 in 2011 to £75,000 in 2016.

Awareness of the FSCS limit change is low…

We conducted some UK-based research and were surprised to find eight in ten people (83%) are unaware that the protection provided by the FSCS for savings will fall on 1 January 2016.

Nearly four in ten people (37%) said they did not know what level of protection the FSCS provides – an increase from a quarter of people (26%) who said this in similar research nine months ago.

Our research also showed that a third of people (34%) believe that the rules around the FSCS are confusing and many overestimate the scheme’s ability to protect them. One in six people (16%) mistakenly believe that the FSCS protects their money against the pressures of inflation and nearly one in ten (8%) thought the FSCS currently provides protection for more than £85,000.

“With the reduction in the FSCS limit just 100 days away, the clock is ticking. Anyone in the fortunate position of having more than £75,000 in savings will want to use this time to take a good look at whether their money is appropriately allocated”, commented Rhydian Lewis, CEO at RateSetter.

“For many people, that might mean splitting savings between different banks and building societies. But some investors have told us that lower FSCS protection will prompt them to seek a better return on money above the new limit – and perhaps this is one of the reasons why we’re seeing increasing levels of investment in peer-to-peer platforms such as RateSetter.”

Is my money protected at RateSetter?

RateSetter is not part of the FSCS, however we’ve put our own protection system in place for investors: we pioneered the industry’s first ever Provision Fund to protect customers’ money.

The Provision Fund is designed to reduce investors’ risk by spreading it across the whole loan portfolio. All borrowers pay into the Provision Fund, which repays investors in the event that a borrower misses a payment or the loan cannot be repaid on schedule for any reason. Whilst your capital is still at risk the Provision Fund reduces the risk of loss so effectively that no individual RateSetter investor has ever lost a penny: a unique feat amongst the major P2P platforms.

The Provision Fund stands at almost £16 million and currently covers expected losses 1.6 times over.

What can I do?

We’re keen for our customers to take measures to protect their money with other providers. The consumer group Which? has provided a handy tool which shows you who owns which financial brands so that you can spread your money around safely. You can read more about the changes to the FSCS here.

How will the changes to the FSCS impact your investment decisions? Will you be moving funds to other institutions such as RateSetter? Let us know what you think about the changes in the comments section below.