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HSBC was fined £57.4mn on Tuesday for failing to identify billions of pounds worth of deposits held by hundreds of its customers who were eligible for protection under the UK’s Financial Services Compensation Scheme (FSCS).
Under the scheme, authorised financial services firms are required to ensure they have systems in place to help regulators identify those customers who would be eligible for up to £85,000 in protection — or £170,000 for a joint account — within seven days of a bank failing.
The case has highlighted which assets are covered if an institution goes bankrupt — and which are not. FT Money looks at the issue.
Is the HSBC case a sign of deeper problems in the sector?
No, according to industry figures. Andrew Hagger, a personal finance expert at MoneyComms, described the case as a “massive fine for what looks like a huge admin error”, rather than anything more systemic. “I don’t see what the bank would have to gain by doing this,” he added.
Emma Barrow, head of communications at the FSCS, said: “From our perspective it was a reporting issue. So I wouldn’t be concerned about it myself.”
The FSCS is also not the only tool the authorities have to address crises when institutions are on the brink of failure. Last March, the Bank of England worked round the clock to enable HSBC to buy Silicon Valley Bank’s UK arm almost immediately after its US parent went bust.
Sarah Coles, head of personal finance at investment broker Hargreaves Lansdown, said savers should also be reassured that “financial institutions are required to have extra layers of capital” compared with before the 2008 financial crisis. “We’re so much better placed than we were,” she added.
So, nothing to worry about?
Not quite. For starters, savers need to remember that the limit covers accounts at each banking group rather than each individual lender. For example, someone with accounts at HSBC and First Direct would only receive £85,000 compensation because the two lenders are under the same licence.
As people head into retirement, Hargreaves Lansdown advises them to have emergency savings to cover one to three years of essential spending, said Coles. According to the Pension and Lifetime Savings Association, that is a three-year total of £111,900 for a “comfortable” lifestyle.
“So they do have to juggle a lot of bank accounts to be safe,” Coles said.
And not all financial products are covered. Money held in epayment companies such as PayPal, school meal schemes and foreign payment firms, Revolut for example, are not covered.
However, some areas previously outside the scheme now receive FSCS protection. Funeral plans were added last summer. Account holders who receive a sudden large payment — such as from the sale of a house or an insurance payout — are covered for up to £1mn for six months after receipt of the money, a change introduced in 2015.
Is the FSCS fit for purpose?
Arguably not. The compensation limit for personal bank accounts, tied to an EU regulation until Brexit, was raised from £75,000 to £85,000 in January 2017. If it had kept pace with inflation it would now be worth more than £108,000. Similarly, if the large payment allowance had been inflation-linked it would now be £1.32mn.
It is also much less generous than the equivalent US scheme, which covers savings of up to $250,000 and pays out almost immediately rather than up to a week after an institution goes bankrupt, as is the case in the UK.
The limit is subject to review by the Prudential Regulation Authority, part of the BoE, every five years. The next review is due by the end of 2025, Barrow said.
Are other reforms needed?
Coles said regulators should constantly review the financial compensation framework. “It has to keep up with how people are using banks and saving,” she said. “You’ve got to have a forward eye on how people are holding their money . . . in addition to closing gaps.”
The rapid growth in popularity of digital assets is a case in point. “We wouldn’t know how stablecoins might be covered,” she said, referring to the form of digital cash that tracks sovereign currencies.
Barrow said the scheme is constantly under review by the BoE and Financial Conduct Authority, citing last year’s addition of funeral plans as an example.
