COINCIDING with a celebrity-laden advertising campaign to boost awareness, the Financial Services Compensation Scheme (FSCS) marked its thirteenth birthday this week. The scheme, which guarantees deposits in authorised banks and building societies of up to £85,000 per individual per institution, has also received official attention of late. The Bank of England, recognising the FSCS’s limitations, has entered into a consultation on how to improve it.
Yet the scheme’s steps towards adulthood do not lend it credibility. Far from needing improvement, it’s unclear how relevant it is at all in a rapidly changing financial landscape. In my view, we should abolish the FSCS for savings accounts entirely. Why?
Used by an ever-growing number of lenders and borrowers, peer-to-peer (P2P) lending is confidently bypassing the jaded state guarantee of deposits in favour of bespoke protection that works in the best interests of customers. P2P platforms offer control and transparency to consumers who want to understand how their money is generating interest. Traditional savings accounts, in contrast, brandish the shiny FSCS stamp of security in lieu of any real information on where consumer money goes, and banks put little effort into paying decent returns.
As founder of one of the biggest P2P platforms in the UK, surely I’ve just been “drinking the Kool-aid” and the FSCS is a much-valued insurance policy in the wake of the financial crisis? A recent RateSetter/Populus survey of 2,000 adults across the UK would suggest otherwise.
The research revealed abysmal levels of FSCS awareness. The adverts don’t seem to have worked, and more than half of UK adults are unaware of the scheme’s existence, despite indirectly paying a premium to be part of it. Of those who are aware, just one in five (22 per cent) say they would be worried if it came to an end.
The findings also echoed concerns over the hidden consequences of the scheme, with two in five people believing the FSCS guarantee encourages banks to take risks. Indeed, it is a form of subsidy for the behaviour of the banking industry, as much as it is a comfort blanket for consumers.
Clearly people are either unaware of or frustrated with this system. In a climate where genuine alternatives to traditional financial institutions are available, they are demanding more. Many alternatives to homogenised, poor value savings accounts, of course, involve quantifiable risks in exchange for decent returns. But at RateSetter our lenders have never lost a penny while earning attractive returns.
In April 2015, dramatic changes to increase pension freedom will take effect, at last entrusting consumers with the power to do what they choose with their own money. Our research shows that now is the time to liberate the savings market too. Shedding savings accounts of needless and costly FSCS cover would be a game changer. It would encourage savers to be more selective in where they put their money, as opposed to blindly chasing headline rates, and it would force banks to lend more responsibly, at a stroke diminishing the risk of further state bail-outs. At most, keep the FSCS to copper-bottom core deposits, but stop it from warping the return-seeking savings market.