A great deal of confusion exists around how the Financial Services Compensation Scheme (FSCS) applies to cash deposits, particularly for businesses. Here we clarify what businesses need to know and how to overcome the obstacles to ensure their company’s cash deposits are protected against loss.
What is the FSCS?
The FSCS is the UK’s statutory compensation scheme that protects customers of regulated financial services firms. It was set up by the Government in 2001 in respect of bank deposits. If an authorised financial services provider fails and is unable to repay customers’ deposits, the FSCS will provide compensation up to a certain limit per depositor depending on qualifying criteria.
FSCS limits and how they have changed over time
Since its inception, there have been a number of changes to the limit of protection provided by the FSCS, which cause confusion.
In 2007, only the first £2,000 of a consumer’s savings and 90% of their next £33,000 were protected. The FSCS deposit limit was subsequently raised to £35,000 in October 2007 and then £50,000 a year later, to raise consumer confidence in the banks amid economic uncertainty.
Then, in 2011, a European-wide directive mandated that all national compensation schemes protect a limit of £85,000 (€100,000 in the Eurozone) to prevent savers moving their money across borders to seek out higher limits of protection.
Since then, the limit has changed twice due to currency fluctuations changing the value of the €100,000 limit in its sterling equivalent. It reduced to £75,000 in December 2015 to reflect the strength of the pound, before increasing to £85,000 again on 1 January 2017, following the drop in the value of the pound after the Brexit vote.
FSCS protection and business cash deposits
For businesses, FSCS protection has been somewhat more complicated. Until 2015, there were restrictions to the provision of FSCS deposit protection for companies (designed to exclude large corporates).
To qualify for protection, a company had to employ fewer than 250 staff, have a turnover of no more than £44m and a balance sheet of no more than £39m. These restrictions no longer apply and all companies are now protected by the scheme, irrespective of their size.
How much of your cash is protected by the FSCS?
Currently, if you're an individual, charity or business, cash deposits are protected by the FSCS up to the value of £85,000 with an authorised bank or building society. Joint account holders benefit from up to £170,000 protection. Although, the same does not apply to businesses where the company is a partnership of two people, and thus they only benefit from up to £85,000 protection per bank.
Some banks and building societies share a banking license with one or more financial institutions that are part of the same banking group. In these circumstances the FSCS treats the group as one bank and therefore only protects up to £85,000 across those institutions.
For example, bank A and bank B share a licence. A business deposits £80,000 with bank A, and £80,000 with bank B. If both banks were to default, the business would only receive £85,000 in compensation for the £160,000 deposited and would suffer a £75,000 loss.
Not all financial institutions are covered
It’s important to note that there are a number of entity types that do not qualify for FSCS protection including:
• credit institutions and financial institutions
• investment firms
• insurance undertaking
• reinsurance undertaking
• collective investment undertaking
• pension or retirement funds
• public authority, other than a small local authority
Similarly, not all banks are covered by the FSCS. Some financial institutions offer banking “type” services, but without a full UK banking licence. These include money remittance services and e-money institutions, which are authorised and regulated by the FCA for their respective services, but do not provide FSCS protection.
Importantly, all banks and building societies that are authorised and regulated by the Prudential Regulation Authority (PRA) are covered by the FSCS.
How to maximise protection of your company’s cash reserves
Finance Directors and Chief Financial Officers have the challenge of navigating the FSCS qualifying criteria to ensure their company’s cash is well looked after.
To clarify, up to £85,000 of a businesses’ cash reserves are protected per bank or building society, which holds its own banking licence and is authorised by the PRA.
To maximise their FSCS cover, businesses can diversify cash reserves across multiple banks and building societies that are not part of the same banking group. This would typically require a lot of time and effort to open and manage several bank accounts.
Our cash deposit platform eliminates the hassle of opening bank accounts and filling out paperwork. With a single application, you can access hundreds of accounts with several banks, enabling swift and easy money transfers.
Not only will Flagstone provide peace of mind that the business’s cash reserves are FSCS protected, but the business can also benefit from market-leading interest rates which could result in thousands of pounds more interest income.