Back in 1994, the European Parliament adopted the EU Commission’s Directive 94/19/EC on Deposit Guarantee Schemes.
Some of the aims of EU treaties are binding on the member states while others are goals to be achieved. Anything laid out in a ‘Directive’ is binding and therefore, the UK Government had no choice but to implement this Directive.
However, the UK Government was very coy about ascribing these Deposit Guarantee Schemes to the EU and instead termed their origin as being the Financial Services Compensation Scheme (FSCS).
While there are many ‘ifs and buts’, for the ordinary person who puts his savings into banks, building societies or credit unions, this Directive seems beneficial because it will reimburse a limited amount of their deposits should their financial institution fail. It also means, of course that if failure seems imminent, there would be less of a chance of a run on banks, etc. which could be calamitous both for them and for the country.
The problem is that individual countries within the EU cannot set the limits for these reimbursements themselves, but are ‘Directed’ by the European Commission (the European Parliament inevitably passes such Directives). In 1994 the reimbursement was set at 20,000 Euros for one person and 40,000 Euros for a couple with a joint account, or equivalent in countries such as Britain which are outside the Eurozone.
But there was and continues to be a catch: depositors have to be certain that the bank, building society or credit union to which they have entrusted their savings is not connected into another where they have also put their money by a bank licence. If this happens, only one reimbursement will be paid out.
For instance, Barclays Bank is linked to Barclays Direct, Standard Life and Woolwich and depositors who have savings in all three would only receive one reimbursement.
This Directive for Deposit Guarantee Schemes was not altered substantially for 15 years although by that time financial markets had changed significantly. The financing of schemes had been left entirely to Member States and this turned out to be disruptive for financial stability, especially when the financial crisis hit in the autumn of 2008.
Therefore it was decided that the level of deposit should be increased and in February 2009 an amendment was put in place covering this. The level of deposit protection was increased throughout the EU, first to at least 50,000 Euros and then to a uniform level of 100,000 Euros per person (or equivalent) by the end of 2010. However, this sum had to be reviewed every five years and adjusted if necessary.
In July 2010 a proposal for a thorough revision of the 1994 Directive was adopted which mainly dealt with harmonising and simplifying of protected deposits, the improving of the financing of schemes and a faster payout if and when needed. Repayments are to be gradually reduced from the current 20 working days to seven working days although this reduction will not begin until 1st January 2019.
Another benefit is that financing requirements ensure that schemes have enough funds in place to deal with small and medium-sized bank failures while large banks will be subject to the Bank Recovery and Resolution Directive (BRRD).
As to the financing of schemes to cover the guaranteed amounts paid out to depositors, it has to be remembered that the EU set the sum in Euros. Over the past year, the value of the Euro against, for instance, the Pound, has dropped, so because the protected limit is reviewed every five years and must always be the equivalent of 100,000 Euros, in July 2015, changes were made to the depositor and policy protection provided by the FSCS.
Whereas the existing level of protection is £85,000 per person or £170,000 for a joint account, this will only be maintained until 1st January 2016 when it will fall to £75,000 (the current equivalent of 100,000 Euros) per person or £150,000 per couple with a joint account. Those with deposits between these limits can decide whether or not to adjust their accounts before this date.
People who will be retiring shortly and decide to take a lump sum from their pensions, as is now possible, must also take care not to place more than £75,000 in one account and to ensure that if depositing with more than one bank, building society or credit union, that these are not linked by one bank licence.
Of course, if the UK were not a member state of the European Union, and the Financial Services Compensation Scheme had been able to set their own compensation limit, the guaranteed deposit limit might well have still been £85,000.