Savers in Scotland could soon find that their deposits are at an increased level of risk if the country achieves independence.
The Treasury has warned that Scottish savers will no longer be covered by the Financial Services Compensation Scheme (FSCS) if the Yes campaign is successful.
The scheme covers deposits up to a maximum of £85,000 per person per financial institution if a bank fails. This includes cash held in current accounts and savings accounts.
The compensation scheme is funded by a levy on financial institutions, which it uses to reimburse savers if a bank or building society fails. Additionally, the Treasury can provide emergency support if there is any shortfall.
But the move towards independence would see Scotland retracted from the scheme, leaving savers in the lurch.
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By European law, the Scottish government would have to establish its own protection scheme, which is expected to be a major challenge.
This may also influence the decision of major lenders to relocate to England if the Scots vote for independence.
UK-based savers with these banks would potentially fall under the ‘passport’ protection scheme if the lenders remained in non-UK territory and did not establish a new UK subsidiary.
And campaign groups are not prepared to let these issues lie. Protect Our Bank Accounts has demanded that a new Scottish government issues a unconditional guarantee that bank deposits will be protected by up to £85,000 (or equivalent) as they currently are as part of the UK.
Passport Protection and ‘Foreign’ Banks
European banks based outside of the UK that receive deposits from UK-based customers offer their deposit guarantees through a ‘passport’ protection scheme, which relies upon the provider’s home government.
Providers that have used this scheme in recent years have included the Bank of Cyprus and ING Direct.
However, the scheme puts savers at the mercy of a foreign government for protection if a bank fails, which often proves problematic.
The well-publicised troubles in Cyprus created a lot of concern among UK-based customers of the Bank of Cyprus, who understood that the Cypriot government would be in no position to help if the bank collapsed.
The bank was faced with establishing a UK subsidiary in double-quick time to prevent a panic, which saw customers come under the reliable protection of the FSCS.
The Bank of England is now keen to clamp down on unnecessary risk, after unveiling plans for a crackdown on lenders without suitable protection mechanisms in place.
The Bank said it needed to toughen up on overseas providers with over 5,000 customers or more than £100 million in British deposits.
Seven retail banks operating in the UK from outside the European Economic Area could now face closure unless they establish a UK subsidiary and pay into the FSCS protection scheme.