Current Banking Crisis - Practical Steps for Stoozers
| Created 10/10/2008 |
We are currently experiencing a period of great turmoil in the banking industry: Northern Rock being taken over by the UK government, the savings portfolio of B&B being bought by Abbey (Banco Santander), Icesave going into receivership, Kaupthing Edge's and (Icesave owned) Heritable Bank's savings portfolios being bought by ING and HBOS scheduled to be taken over by LTSB. In this article, we take a look at what impact this has on stoozers and suggest some practical steps that you may wish to consider, to help manage risk and navigate through the current crisis.
Risks for Stoozers
For anyone with an attention to detail, stoozing has always been a low risk activity. However, the banking crisis has brought some new risks to the fore - risks which few of us had considered to be anything much more than theoretical. The risks are:
- Partial loss of Stooz pot money, leaving the stoozer unable to pay off credit card debts and with a real loss of cash
- Delayed access to Stooz pot money, meaning the stoozer can't access funds in time to pay off a credit card that has come to the end of its 0% introductory period.
Let's take a closer look at these and suggest some ways to reduce your exposure and to deal with the risks should they actually materialise.
Partial loss of Stooz pot money
If a bank goes into default (it is unable to pay its creditors, including savers), then a stoozer could lose his/her stooz pot money. However, to protect savers from losing all their money, the UK and other countries provide compensation schemes which guarantee some or all of those savings. In the UK, the scheme is operated by the Financial Services Compensation Scheme (FSCS) and applies to UK banks and some overseas banks with a UK subsidiary.
From 7th October 2008, the scheme guarantees 100% of the first £50,000 of money invested per authorised institution per person. This means that a couple with a joint savings account would have £100,000 protected by the scheme. One thing to be wary of is the "per authorised institution" phrase. If you have multiple savings accounts with the same organisation or subsidiaries of the same organisation, your individual protection is still only £50,000.
For example if you had £30,000 saved with Halifax, £30,000 with Birmingham & Midshires and £30,000 with Bank of Scotland, then you would have £50,000 of that protected because all three are subsidiaries of the HBOS group. Any savings in an institution that exceed the £50,000 per person is not protected and could be lost if the bank defaults. Stoozers need to be aware for this.
Foreign Banks operating through a UK subsidiary may also have their savings protected through the FSCS scheme, but others exempt themselves from it. An example of the former is Icelandic Bank Kaupthing Edge and an example of the latter is Icesave. Icesave is protected by the Icelandic scheme which guarantees the first 20,000 € and the UK FSCS guarantees the balance between that and £50,000.
Icesave is in receivership and is likely to go in to default, so the compensation schemes would kick in. However, the Icelandic scheme did not have sufficient funds to pay out. This was a huge potential threat to savers who could have lost the first 20,000 € of their money. The good news is that the UK government has stepped in to guarantee all savings in Icesave - not just up to the £50,000 FSCS limit but all UK savers money. For more details see this treasury press release
Although Kaupthing Edge was protected through the FSCS scheme, its savings business has been bought by the Dutch bank ING Direct. Money in ING Direct is protected by the Dutch Deposit Guarantee Scheme which protects the first 100,000 €.
Partial Loss of Stooz Pot - practical steps
Having understood that your savings could be at risk if a bank defaults, consider the following suggestions to reduce the chance of this happening to you.
- Understand what savings guarantees are in place for any savings account that you have
- Ensure that you do not deposit anymore than the guaranteed limit
- If you have a long-term relationship, consider placing your stooz pot in a joint account so that your level of protection is doubled (remember that the UK scheme is per person). If you are in different tax bands, then you may prefer to keep the stooz pot in the name of the one who pays the least tax
- Remember to check whether your savings accounts are part of the same banking group, in which case the guarantee will only apply once
- If your Stooz pot is greater than the guarantee, then split it up across more than one account, so that it is all guaranteed. See our savings table for some suggestions
- If you have a mortgage, consider getting an offset mortgage and stoozing your money into the savings account that is linked to your mortgage. Should your mortgage company go bust, then your savings will be 'set off' against your debt and the net amount you owe will be reduced. This means that the FSCS guarantee limits are irrelevant. Of course, the other reason to use an offset mortgage is that your stoozing earnings are effectively tax free. For more details, read our guide to Stoozing and Offset mortgage
Delayed Access to Stooz Pot Money
If your bank defaults and can not give you back your money, then one of the compensation schemes should come into operation. However, an application has to be made to the FSCS (in the UK) and it is being widely reported that it could take 3 months before compensation is received. For a stoozer, this could mean that you would be unable to pay off a credit card that has just come to the end of its 0% introductory period and you would get charged interest on the balance remaining on the card. This could turn a profitable stooz into an unprofitable one overnight.
This is the position that Icesave customers may be in right now. Although Icesave is not yet in default (technically), it is in receivership and the result is that withdrawals from Icesave accounts have been halted since the beginning of the week. Any stoozer who has their money in Icesave needs to take some steps now to ensure that they avoid having to pay interest on their credit cards while waiting for compensation.
Delayed Access to Stooz Pot - Practical Steps
- To minimise the risk of being unable to withdraw money from your stooz pot, consider spreading it across multiple accounts with different institutions - even if your total stooz pot is under the £50,000 FSCS guarantee. Why do this? It means that all your eggs aren't in one basket. If one bank defaults, then you would still be able to pay off some or all of any one credit card from another bank account. You could go as far as to have as many savings accounts as you have credit cards.
- If you find yourself unable to withdraw money from your stoozpot (e.g. If you are an Icesave customer today), then consider doing one or more of the following:
- Find out your current balance on the account so that you are ready to make a claim. Although you can't withdraw money from Icesave, you can still log in and print off your statement and balance. Do it now!
- Submit your claim to the FSCS (or equivalent overseas body) as soon as you can
- Ensure that you know when your next 0% offer is about to expire and how much the balance is.
- Rather than pay off an expiring credit card, do your best to make sure that you have another 0% card that you can transfer the balance to. This will give you time to receive your compensation and then be able to pay off the card later.
- Don't leave researching and applying for your next 0% card until the last minute. Do it now. See our 0% cards table for the latest deals
- See if it is possible to borrow some money from a family member to pay off the card if your compensation does not arrive in time. In general I am against borrowing money from any individual - especially family members. However, a short term loan may be a practical solution for some.
- If all else fails, call your credit card company and explain that your money is tied up in a defaulting bank and ask them if they would consider extending your 0% period in the light of the exceptional circumstances.
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Additional Information & Useful Links
Savings accounts
0% credit cards
Offset mortgage Stoozing
Offset mortgage products
FSCS
HM Treasury Press Releases
This article does not constitute financial advice. It contains suggestions and ideas of how stoozers could protect themselves in the current climate.