In a move that will be welcomed by many UK savers the Bank of Cyprus is set to join the UK Financial Services Compensation Scheme (FSCS).
At present savers with the Bank of Cyprus are protected by the Cypriot Deposit Protection Scheme, which provides cover up to €100,000, equal to approximately £80,000 at the current exchange rate. However, the bank’s UK subsidiary will now become a member of the UK FSCS, probably in around a month’s time.
Over the past few months some savers, as well as a number of financial experts, have become concerned about the Cypriot economy and its government’s ability to stand behind their compensation scheme. The news that the 50,000 Bank of Cyprus savers in the UK will in future be covered by the FSCS will be a relief to many.
The move by the Bank of Cyprus to register its UK arm under the FSCS follows similar moves by other foreign owned banks, for example the UK arm of Spanish owned Santander is a member of the FSCS.
The UK FSCS, which is ultimately backed by the government, provides protection for savers, up to £85,000 per person per institution, should a bank or building society become insolvent.
The interest rates offered by the Bank of Cyprus are particularly attractive for notice accounts and Junior Cash ISAs, although the move to become a member of the FSCS may well see the bank launch more competitive fixed rate bonds in the knowledge that the new FSCS coverage will make them more attractive to UK based savers.
There are still three banks operating in the UK who are not members of the UK FSCS, leaving savers to rely on foreign compensation schemes if the bank becomes insolvent.
The three are ING Direct and Triodos Bank who are covered by the Dutch compensation scheme and Marfin Laiki Bank who are members of the Cypriot scheme.
ING Direct are certainly the most high profile of the three, however the past few months has seen a marked reluctance amongst UK savers use banks who are not members of the UK compensation scheme. There are a number of disadvantages to this ‘pass porting’ arrangement.
Firstly, at the current exchange rate the compensation levels from other European schemes is less than that provided by the FSCS.
Secondly any compensation scheme ultimately needs the government to step in should a bank fail; many experts are concerned that, especially in the case of Cyprus, the government would not be able to bail out savers in the event of a bank collapse. The dangers of overseas compensation schemes was illustrated a couple of years ago when the Icelandic government could not, or indeed would not, compensate UK savers following the failure of Icesave and Kaupthing Singer.