Savings account compensation only paid out minus borrowings

08 October 2008 / by Rachael Stiles
Those who are relying on the Financial Services Compensation Scheme (FSCS) to refund money from savings accounts held with banks that have collapsed should be aware that the payout they receive will have any borrowings deducted that the customer holds with the same financial institution.

People who have savings accounts and borrowings with the same bank will find that they might not get back what they expect from their savings account compensation, warns Andrew Hagger, from

Recent turmoil in the banking sector may have made the public more aware than ever of the role that the FSCS plays in the personal banking sector, but many are still unaware of the potential effects of saving and borrowing money from the same bank.

When this is the case, any outstanding money owed to the bank – such as a mortgage, loan, or credit card debt – are taken into consideration before a claim is paid, and the savings will often be used to pay off the debt, with the remainder – should there be any savings left over – being paid to the customer.

For example, customers who have savings of £30,000 – well within the savings guarantee of £50,000 – but who have an outstanding loan balance of £20,000 with the same company, will only receive £10,000 of compensation, while the rest will be used towards clearing the debt.

While this does not mean that the customer loses money – because it has been used to repay their own debts or reduce the amount they owe – it can seriously alter an individual's finances.

Mr Hagger warned that "the whole dynamics of your personal finances could be thrown into disarray as your access to liquid funds will have been severely reduced or in some cases will have disappeared."

© Fair Investment Company Ltd