What happens if a bank goes bust? How to make sure your savings are protected

moneyWe’re feeling a little nostalgic here at BW. With Iceland being top of the popularity stakes again owing to its latest volcanic ash spluttering, we remembered the sterling job Icelanders (and specifically Icesave) did in shafting UK customers out of their money (including numerous local councils) back at the height of the banking crisis.

Of course, these weren’t the only banks to go bump, Northern Rock having the dubious honour of being the first UK bank to stumble to its knees. So we thought, in case you are having flashbacks and fretting about your wodges of cash, that we would give you a handy Bitterwallet guide to protecting your savings.

UK FSA regulated banks

Firstly, you are probably aware of the Financial Services Compensation Scheme (FSCS). This applies to savings in UK regulated banks (which is not necessarily just UK banks) and, courtesy of Northern Rock, the amount protected was increased from £50,000 to £85,000 per person, per licensed institution. Get in.

Two important points to note- the limit is per person, so joint accounts get double, but you do need to be aware if you have different accounts with lots of money in, please consider donating to the impoverished writers’ fund you need to make sure they are not only covered by one single licence, so you would therefore only get one lot of £85,000 protection.

For example, Santander recently acquired the retail banking of other institutions, like Bradford & Bingley and Alliance & Leicester. These accounts are under the single licence of Santander, so you only get one lot of £85,000. However, the HBOS/Lloyds takeover retained the two banks’ separate licences, so you get £85,000 for HBOS and £85,000 for Lloyds TSB. But don’t forget- accounts with Lloyds and C&G will both come under the Lloyds licence, and accounts with Halifax, Birmingham Midshires and the AA (!).

A similar deal applies with building societies. The biggest one to watch out for is the Nationwide, Derbyshire, Cheshire and Dunfermline all share a single FSCS compensation limit.

But what about non-UK banks?

Banks from outside the EEA who want to trade in the UK will have to get an FSA licence so you will be covered. However EEA banks (which included Icelandic banks) do not have to, they can instead rely on the EEA Passport scheme.

However, you might still be OK. The FSA has a FSCS top-up list of overseas banks that operate in the UK but who have subscribed to the FSCS. These include  ICICI, Citibank, Egg and Firstsave.

But do not fear. After the Icelandic situation, in December 2010, the maximum compensation offered under the EEA Passport scheme was increased to €100,000, which, on current rates, works out at a smidge more than the UK’s £85,000. Although it does mean that you will have to deal with European bureaucrats instead of just UK ones at the FSA.

And that is perhaps the point. Although this protection exists, to actually have to go through the process of claiming the compensation is likely to be a long drawn out and stressful affair. The good news is that, even at the depths of the financial crisis, the Government preferred to bail banks out, than let them go to compensation. Of course, there is no guarantee that they would do the same again, which is why the guarantee scheme is important. Either that, or get a Very Large Mattress.


  • Sawyer
    I had an Icesave ISA at the time of the collapse - am I right in thinking they were covered anyway, either by a passport scheme or the FSCS... up to the then-limit of £26,000? I know the Government bailed all the UK savers out anyway, but I remember wondering what all the fuss was about, as anyone who knew what they were doing* would be compensated. Anyway, I got my cash back. It's in a Bitterwallet-endorsed NS&I bond now. *local councils excepted.
  • Late
    What are "savings"? :(
  • Alex B.
    @Sawyer the problem with the Icelandic passport cover was that it wasn't well-funded enough to cover all its liabilities, and the Icelandic government refused to make good the shortfall. This meant that anyone who had savings of less than the passport threshold was due to get *nothing* back, and anyone who had savings greater than the passport threshold was only due to get the *difference* between their savings and the threshold (from the FSCS). As it happened, the UK government (i.e. taxpayers) stepped in and effectively extended the FSCS threshold down to £0 for private savers. The Netherlands did the same. We're both now trying to get the Icelandic government to pay what it should have paid under its passport scheme over a medium- to long-term time scale, which isn't terribly popular with Icelandic taxpayers, unsurprisingly.
  • My s.
    @Sam Thewlis Good work. If you are looking for a subject for a follow up article, I'd be interested in the arrangements for covering shares held in nominee accounts (e.g. self select share ISAs but also some other stocks & shares savings or pension products). As far as I understand these are only covered to the extent that they are (a) held in a separate account to the main business account of the provider and (b) there is indemnity insurance in place to cover wrong doing. Am I right? What if this goes wrong? What are the limits of the insurance they should have in place? Thanks
    where is the link 'posted' on this website. i cant find it
  • S.Boam
    My mum was recently bereaved. She now has savings of £130 00, in Derbyshire Building Society.How safe are they. What compensation would they pay out if the building society collapsed.
  • Indian P.
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