Introduction
Imagine you’ve worked tirelessly to build your small business, steadily growing your savings, only to see them at risk in the event of a bank failure. It’s a scenario none of us want to picture, but one that is crucial to consider. This is where our latest guide comes into play. We’re going to delve into a topic that’s massively vital yet puzzlingly overlooked by many SMEs: How to protect your business savings. Through this guide, our aim at Devonshire Green is to provide you with a clear, easy-to-understand guide on a potentially complex subject – the Financial Services Compensation Scheme (FSCS). So, let’s peel away the jargon and make sure your hard-earned savings are safe, shall we?
Understanding FSCS Protection
The Financial Services Compensation Scheme (FSCS), ever heard of it? If not, don’t worry, you’re not alone. Despite its significant impact on your business finances, it’s something that often gets brushed under the carpet. But we’re here to change that.
Established as the UK’s statutory deposit insurance and investors compensation scheme, the FSCS serves as a safety net for customers of authorised financial services firms. In simple terms, it’s there to cushion your fall if your bank or any other FSCS-protected firm fails.
Now, remember this figure – £85,000. That’s currently the maximum amount of savings the FSCS can protect per individual, per institution. So, if your business holds more than this in a single financial institution, and it goes down the drain, you could lose any surplus over that amount.
We know it’s a lot to take in. It might also be a little unnerving. But understanding this protection and how it works is the first step in making sure your business savings stay right where they should be – safe in your pocket, ready and waiting for when you need them.
Historical Context of FSCS Protection
Now that we’ve covered the basics of FSCS protection, it’s time to take a quick trip down memory lane. What’s the history behind it all? Why was this protection put into place, and why were the limits increased over time?
The FSCS was introduced in 2001 as a crucial safety measure to protect consumers and maintain confidence in the UK’s financial system. The idea was simple: if a financial institution goes under, the FSCS acts as a safety net to ensure that consumers (like you and your business) don’t bear the brunt of that failure.
Originally, the FSCS limit was set at £50,000. However, following the financial crisis of 2008, it was clear that to maintain confidence in the banking sector and offer better protection to savers, a change was needed. That’s why, in 2015, the limit was increased to £85,000.
The rationale behind setting it at £85,000 is linked to the European Union’s deposit guarantee schemes directive, which stated a limit of €100,000. The Bank of England chose to align the FSCS limit with this, converting it to pounds sterling. This amount was reviewed every five years and adjusted based on the exchange rate, which is why it ended up at £85,000.
This raise was a game-changer as it meant more savings were now protected. It was a welcome boost to SMEs who often have substantial sums held in their business accounts.
Now you might wonder, “What about today? Is £85,000 still enough?” That leads us nicely to the ongoing discussions in 2023. But we’ll get to that later. First, we will guide you on how to identify if your bank is protected under the FSCS, which is crucial in ensuring your funds are safe. So, let’s get started.
Identification of FSCS-Protected Banks
Knowing that the Financial Services Compensation Scheme exists is one thing, but figuring out which banks are FSCS-protected? That’s where it gets a bit tricky. Don’t worry, though, that’s what we’re here for!
Every bank, building society, and credit union in the UK is obliged to be part of the FSCS, provided they are authorised by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). These are the regulatory bodies that keep an eye on financial institutions, ensuring they’re playing by the rules and treating their customers fairly.
So, how do you know if your bank is FSCS-protected? The answer lies with the aforementioned Financial Conduct Authority. All FSCS-protected banks are listed on the FCA’s Financial Services Register. It’s essentially a massive list of the firms, individuals and other bodies that are, or have been, regulated by the PRA and/or the FCA.
Going to the FCA’s website, you can access the Financial Services Register and search for the bank you’re interested in. You just need to type in the name of your bank in the search bar, hit enter, and browse through the results. If your bank is listed here, it means they’re FSCS-protected.
You also might notice that some banks have a ‘trading name’ listed. This is essential to pay attention to, as it may indicate that your bank is operating under a different banking licence. We’ll delve deeper into the importance of this in the next section.
It’s all about taking the time to do your homework. It might seem a bit of a chore, but when it comes to protecting your hard-earned savings, it’s definitely worth the effort.
Understanding the Protection of Challenger Banks
Now that you have a grasp on traditional banks and their FSCS protection status, let’s talk about the new players in the financial game: challenger banks. These are smaller, relatively new banks set up to compete with the long-established big banks. But the question on everyone’s lips is: “Are they as safe as traditional banks?”
The swift and simple answer is yes, in most cases, challenger banks also offer protection under the FSCS as long as they are authorised by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). This means up to £85,000 of your money deposited with them should be protected if the bank was to fail.
Brand names like Monzo, Starling, and Revolut might spring to mind when talking about challenger banks. These banks have gained rapid popularity and have a full banking licence, meaning they’re also covered by the FSCS.
Of course, not all challenger banks are created equal, and while many have FSCS protection, some operate under an ‘Electronic Money Institution’ license. These banks, while still regulated by the FCA, don’t offer FSCS protection. Instead, they must keep client funds segregated in separate accounts, which theoretically should protect your money if the bank goes under. However, it’s not quite as iron-clad as the FSCS protection.
To check whether a challenger bank has FSCS protection, the process is the same as with traditional banks. You can look them up on the Financial Services Register on the FCA’s website to ascertain their status.
This might seem complicated, but don’t worry. It’s all about staying informed and double-checking where your money holds its ground. Let’s move on to an important subject that’s often overlooked: the issue of banking licences and how it impacts your FSCS protection.
Multiple Accounts and the Same Banking License
By now, you’re becoming an expert in the FSCS and how it can protect your business’s savings. But there’s one more piece of the puzzle that we need to examine: banking licenses. Specifically, how holding multiple accounts may affect your level of FSCS protection.
You might be thinking, “I’m protected up to £85,000 with each bank, right?” Well, not exactly. The key is in the wording. The FSCS protects your savings up to £85,000 per person, per banking license, not per bank.
What does this mean? Well, if you have accounts with several banks, they may actually be operating under the same banking license. Your protection, in this case, still caps at £85,000 in total, not £85,000 for each account. Therefore, spreading your savings across multiple accounts won’t necessarily offer extra protection if those accounts fall under the same banking license.
For instance, HSBC and First Direct both operate under the same banking license – HSBC’s license. So, if you have accounts with both these banks, your savings are collectively protected only up to £85,000.
How can you find out which banks share a license? You might have guessed it – pop over to the FCA’s website. When you look up a bank in the Financial Services Register, take a closer look at the ‘names’ section. If you see ‘trading names’, that could indicate that your bank is operating under a different banking license.
Once again, it’s crucial to check the status of your individual bank accounts. As we all know, when it comes to your hard-earned money, it’s better to be safe than sorry.
FSCS Protection Limit Discussion in 2023
So, we’ve covered the ins and outs of the FSCS, from its history and function to understanding the nuances of banking licenses. Now, let’s talk about the current landscape. The year is 2023, and discussions are afoot about potentially increasing the FSCS protection limit. You might be wondering what this means for your SME.
The conversations around increasing the FSCS protection limit stem from various factors. Inflation is one key consideration, along with the general rise in the cost of living and, consequently, business operational costs. The idea being discussed is to ensure the protection limit keeps pace with these changes, continuing to offer substantial security to businesses and individuals alike.
Increasing the limit would certainly be a welcome development for many SMEs, as it would mean a greater safety net for your savings. The larger the cushion, the softer the potential fall, after all.
However, while the discussions about the increase are ongoing, no concrete decisions have been made just yet. Therefore, as of now, the £85,000 limit stands. It’s essential to keep this in mind when considering how best to safeguard your business savings.
Remember, these discussions highlight the importance of staying informed. The financial landscape, including protections like the FSCS, is continually evolving. Staying abreast of these changes is crucial to securing the financial health of your business.
So, as we anticipate the outcome of these discussions, the key takeaway remains: make sure your SME’s savings are as protected as possible under the current stipulations of the FSCS.
Final Thoughts
In the dynamic world of business, it’s all too easy to overlook some aspects of our financial health. However, as we’ve explored in this guide, protecting your business savings is an area that deserves your attention.
Having a clear understanding of the Financial Services Compensation Scheme (FSCS) and its protection limit is crucial for every SME. Whether you bank with longstanding traditional institutions or emerging challenger banks, the knowledge that your savings have a safety net offers priceless peace of mind.
However, remember the all-important nuance: it’s not necessarily about each bank, but each banking license. So, take the time to dig a bit deeper into the banks holding your accounts and ensure your savings are spread sensibly, offering the maximum available protection.
Finally, keep your ear to the ground for the outcomes of the current discussions about potentially increasing the FSCS protection limit. If approved, this could be a significant boost for SMEs, widening the safety net for your well-earned savings.
