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Robbing the prudent to protect the irrational

The UK's Financial Services Compensation Scheme (FSCS) was increased over the weekend by law from £35,000 to £50,000.  This means that for any banking collapse in the future, savers and depositors get their money back within seven days guaranteed, regardless of their loans and borrowings.

This is meant to restore some confidence in the system, and to ensure that UK citizens don't run away and stuff their money in accounts in other countries.  This concern was raised when Ireland introduced an unlimited guarantee on bank deposits last October.

Excellent.

The government guarantees our deposits and savings.

Like most people, I therefore make the assumption that these are government guarantees.

They are … and they're not.

The government guarantees these savings and deposits but the industry pays for it.

The government takes the money from the banks operating in the markets and these are not the failing banks, but the surviving banks.

If you look at the Scheme in more depth, you find that the FSCS is funded by levies (read 'taxes') on firms authorised by the Financial Services Authority (FSA).

The FSA calculates the levy on a proportionate basis and, in the case of banks, it is based upon the size of their deposit base.  The more money you have in the bank, the more you pay.

For 2008/09, the levy was £131.7 million, up from £94.5 million the year before and, bearing in mind that some firms are no longer paying the levy as they are failing, this puts more onus on the ones who can.

Equally, with Icesave's collapse at an estimated cost of £800 million, Bradford & Bingley's toxic buy-to-let mortgage losses and other exposures, some banks and building societies are paying a massive chunk of what would otherwise be profit or interest to the FSCS.

For example, one firm with around £10 billion in deposits tell me that they expect to pay around £150 million into the compensation scheme this year. 

This firm has never made a loss, needed no government bailouts and exercise a very cautious approach to lending in the interests of rewarding depositors.

As a result, they claim the scheme robs the prudent to protect the irrational.

The truth is that the way the government bandies around their guarantee is what irks some, as it is wrapped up in a cloud of tax on the industry and some feel the term "government guarantee" is therefore duplicitous.  A strong word, but it demonstrates their issue well.

Equally, the UK is not unusual in acting this way, as America's Federal Deposit Insurance Scheme (FDIC), created after the over 2,000 bank failures after the Great Depression, "is funded by
premiums that banks and thrift institutions pay for deposit insurance coverage".

Whatever you believe, the industry should protect the innocent but not at the cost of the innocent, and government should make it clearer that it is not their guarantee but the industry's.

Uh-oh … the industry guarantees that the industry is safe?

Nope, let's keep it as a government guarantee then.

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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