Comparing interest rates for savings, what’s protected?

05/10/2010
by Paul Dicken
Comparing interest rates for savings, what’s protected?

With high inflation making the interest paid on some savings accounts negligible, savers are likely to search far and wide for the best rate.

The Icelandic banking crisis and collapse of Icesave required a commitment by the UK government to safeguard British savers, which may have left some wary of saving with international banks.

In fact, most international banks operating in the UK will be regulated by the Financial Services Authority (FSA), but it is always a good idea to check what protection is available for your savings.

The best deals on savings accounts may be from international banks operating in the UK looking to expand into the UK savers market. Using attractive rates to win new customers and boost capital.

Considerations

Julie Smith, investment administration manager at Fair Investment Company said: “Savers should check that a firm is regulated by the FSA and may also want to look at whether a high fixed rate bond being offered is by a bank with lower financial strength compared to a bank offering slightly lower rates.

“If you are happy with that risk it is ok, but it may be a considering factor.”

If a bank operating in the UK is regulated by the FSA then deposits up to the limit in place will be protected by the Financial Services Compensation Scheme, in the event the bank becomes insolvent and is unable to pay back deposit holders.

The current deposit guarantee is £50,000 per person with this set to increase in December to an equivalent to €100,000, in line with a European Union directive.

Some banks have credit ratings provided by independent agencies, such as Standard & Poors or Moodys, which can provide a guide to financial strength, while investors may also wish to research what capital an institution holds.

A good source of information on individual banks and building societies is their annual reports, normally available on corporate websites. Reports will detail the assets held by a firm and capital ratios.

Independent financial advice should be sought if clarification is needed on financial strength of institutions or for more information about investments.

Regulation

The FSA Register lists those firms it regulates, as well as firms authorised by another country in the European Economic Area (EEA). This Register can be checked online to see if a bank is regulated by the FSA.

Firms authorised in another part of the EEA may be covered by different compensation arrangements, so information should be sought about these.

Some firms may ‘top-up’ their home country protection scheme to meet the UK FSCS level. These firms are listed on the FSCS website.

For example, international banks, like the Indian banks Bank of Baroda and ICICI, are based in another country but their British based business is regulated by the FSA and UK deposit-holders are covered by the FSCS scheme.

Other factors

It is also worth bearing in mind other terms and conditions when looking to open a savings account.

As well as common restrictions on withdrawals or the minimum amount needed to open an account, a bank or building society may require new customers to open a current account at the same time.

Finding out where the nearest branch is may also be a consideration in case any enquiries need to be made in person.

© Fair Investment Company Ltd