Cash ISAs & Reduced FSCS Max

colsten

KGriff wrote: »

Neither of our accounts terms and conditions have yet been altered to reflect this claim/statement, which appears to me could be advice rather than anything formal in writing, unless George Osborne includes it in his Autumn Statement. My wife and I will abide by our accounts terms and conditions, until such time as we see something a little more formal on this issue.

The official statement is somewhere on the BoE website - I think it might be this one: http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps1815.pdf.

I doubt George Osborne will mention anything about it in his autumn statement as no change of law will be required.

KGriff

http://www.fca.org.uk/firms/being-regulated/meeting-your-obligations/firm-guides/organisations/fscs

I did also find this document here (see above link) which is a bit vague and weak inferring that transfers would be allowed in a six month only period (pity it's only 6 months to get out of jail free) starting 1st January 2016, but it does not mention 'clearly' what the position is in the case of existing and signed 'fixed term' contracts.

I suggest just to be on the safe-side that people considering such a move, like observer22, ought to perhaps first make contact with their original providers and see if they are happy to 'waiver' the existing terms and conditions in the circumstances and maybe refer them to the links on the BofE and FCA websites.

Each individual case will be different depending on the their circumstance, including their original terms and conditions and the rates of interest involved when switching. It is not clear if you can switch most of the money, (which some may want to do if better rates are on offer), or just the part that will exceed the new FSCS limit of £75,000.

I have gained a few things from all this, not least that the drop in the FSCS limit changes at the end of this year and not in April 2016 as I had initially thought. I also think that the FCA's current statement above is rather weak and still gives room for some providers to invoke a penalty for early transfer. The FCA needs to make the position clear to the providers and the public on these type of important issues, at least then we will know for sure, where we stand.

bowlhead99

KGriff wrote: »

I did also find this document here (see above link) which is a bit vague and weak inferring that transfers would be allowed in a six month only period (pity it's only 6 months to get out of jail free) starting 1st January 2016,

I didn't read anything about a 6 month period to get out of jail free starting next year. The article makes the point that the new rules (which also allow the "one off temporary balances" from house sales etc) came in on 3 July this year although people with cash already on deposit can keep their £85k of protection until 1 Jan next year. That is 6 months, during which you might like to get your house in order if you wish to manage your account down to the limit, by removing that part of your funds which would take you over the new limit.

There is no implication anywhere on the FCA, PRA, BoE or FSCS websites that you can still have £85k in an account next May, for example, and still be covered just because it's within 6 months of January 2016. The compensation limit will be reduced in January. If you have more than the limit, and you want to be below the limit, take action. You can see it coming and if you have large enough balances to be affected, you have had your 6 months notice.

It is not clear if you can switch most of the money, (which some may want to do if better rates are on offer), or just the part that will exceed the new FSCS limit of £75,000.

If you have £80k in an account which is currently covered by FSCS protection and in January only £75k will be protected, it is fair that the banks will be instructed to let you take out the excess to manage to the limit, when your motivation to move money out of the account is because of the loss of protection on that part of your funds and the FSCS protection to £85k is one of the reasons you were willing to initially have over £75k in the account.

However there is absolutely no reason that a bank should let you switch *most* of the money out of the account (e.g take out £70k leave £10k behind) without penalty if it's a fixed deposit account. You promised the bank to leave your money with them for a fixed period and that meant they could go and deploy the funds within their business because they did not need to have it available to pay you back on demand. That is why they offered you the high(er) fixed rate in the first place.

So, if you now decide to withdraw £70k because you prefer someone else's product, there should be no expectation whatsoever that you can do that penalty-free and say it was a consequence of a small change in FSCS protection. The regulators /FSCS scheme administrators are not going to screw over the banks by letting customers rewrite the contracts.

I also think that the FCA's current statement above is rather weak and still gives room for some providers to invoke a penalty for early transfer.

I would hope that some or all providers invoke a penalty for early transfer, beyond that small amount that needs to be transferred to maintain the completeness of coverage as a consequence of the £10k limit change.

Otherwise, those of us who have deliberately accepted lower interest rates to preserve flexibility would have effectively been done out of our potential income, because we had no expectation that you could just sign up for a lock in and then break it early and be let off the break fees. It would hardly be fair and equitable treatment for those of us who played by the rules. However, we know from experience that some banks may voluntarily waive fees or penalties from time to time to appease customers with large balances who may be profitable to them now or in the future, that's just business I guess.

KGriff

Bowlhead99,

Can I just clarify with you please just one or two points. Using the example I gave, above which is similar to my Wife's current position.

My Wife opened the Leeds 2yr FRISA in April this year and paid in her initial deposit cheque and also transferred her previous years cash ISA's to her account, giving her a total of just over £80,000.

The Leeds iSA is fixed for 2 years paying 2.1% and when the FSCS limit drops to £75,000 she will be putting £5,000 (plus interest) at risk, that's if Leeds BS suddenly collapses next year.

Are you saying she can move the money 'over and above the £75,000'... and the Leeds will not invoke the terms and conditions? I believe the 'terms' state she would otherwise incur a loss of 90 days interest on the whole amount (£80,000+)... or at least the penalty is something very similar to that.

My thoughts were that the Leeds building society would still invoke some kind of penalty, but perhaps it would only apply to the money moved out (£5,000 plus interest), rather than the entire amount held in her account. In other words we may see some kind of compromise from the financial institutions, but they may agree to no penalty in some cases, but that maybe for negotiation.

Hence I still think it would be wise for the OP, observer 22, to contact his existing provider before moving any cash to see exactly what their position is, that's if the existing terms state there maybe some financial penalty incurred normally.

In my wife's particular case, she has chosen to not move her money as she is happy to take the risk for the remainder of the 2 year term of the Leeds ISA, but will then transfer and separate her funds into smaller bundles in 2017 instead.

Her decision for this is mainly because the rates elsewhere are so low. She wants to keep her money tax sheltered (where possible). She has money in other financial institutions and done the usual current accounts (Santander 123 etc.) and she has money in managed funds and shares, which she sees as being far more at risk than the Leeds BS collapsing in the next 12-18 months.

Both she and I do our best to ensure that the accounts are spread far and wide across many financial institutions, so we do 'normally' stay within the FSCS limit, but this impending change has caught us both out, but we are happy to take the short-term risk for the one year or so until we can put something better in place in 2017.

Saving and investing can often bring some risk and compared to risks we took when we were in our 20’s and 30’s, we see the short-term risks here, as being a lot less than some of the other things we have encountered along the way.

I appreciate however that some people may have different circumstances, or they are not willing to take any such risks with their hard-earned money.

I would be interested to hear from anyone who thinks my wife should not incur any financial penalty if she moves her money out of the Leeds BS 2yr FRISA, particularly as Bowlhead99 says, she has been rewarded with a higher rate of 2.1% by fixing the term and so some kind of penalty should be applied, otherwise it would be unfair to those savers who had forethought & didn't fix and got paid a lower rate.

A very good point from Bowlhead99 and one I think the financial institutions may use to penalise those that choose to escape with any cash, held in fixed term accounts, above the new FSCS limit in 2016.

colsten

Leeds BS 2-year ISAs usually allow withdrawal/transfer-out of up to 25% of the balance without notice or loss of interest prior to maturity. That more than covers the £5K + interest your wife might want to move.

But even if your wife had an ISA that would charge penalties for early withdrawal, the Leeds would have to allow her to make a one-off withdrawal/transfer of up to £10K, due to the reduction of the FSCS limit.

If she puts the £5K-£10K into a 3-year ISA, she can get more than 2.1% interest. If she needs to spend the money within the next 3 years, she can put it into current accounts / regular savings accounts and realise more than 2.1%. She could also consider an S&S ISA which can yield more than 2.1%.

She can alternatively, as you say, take a flyer and determine that in her view the Leeds won't go bust whilst her ISA matures, and leave her ISA untouched.

bowlhead99

KGriff wrote: »

Are you saying she can move the money 'over and above the £75,000'... and the Leeds will not invoke the terms and conditions? I believe the 'terms' state she would otherwise incur a loss of 90 days interest on the whole amount (£80,000+)... or at least the penalty is something very similar to that.

Yes, I am saying that. The FSCS and regulators have said that the banks must allow people to get their excess out without penalty, where the excess has arisen as a result of the decrease in compensation limit.

Ordinarily, perhaps the account is not one that allows partial withdrawals and hence withdrawing all the money would incur a penalty on the whole amount. I don't know the detailed T&Cs of the account. However as part of the transition rules, they have to let you get your excess out and they have to let you keep your terms on the rest of it.

My thoughts were that the Leeds building society would still invoke some kind of penalty, but perhaps it would only apply to the money moved out (£5,000 plus interest), rather than the entire amount held in her account. In other words we may see some kind of compromise from the financial institutions, but they may agree to no penalty in some cases, but that maybe for negotiation.

They have to let you get the element of the money out which lost its protection, and they can't charge you a penalty to disincentivise you from doing it. They do not have to let you take the rest of the money out and would likely charge you a penalty on the rest *if* you wanted to move the rest out, which I understand you don't.

Hence I still think it would be wise for the OP, observer 22, to contact his existing provider before moving any cash to see exactly what their position is, that's if the existing terms state there maybe some financial penalty incurred normally.

That's a very sensible thing to do if you plan to break the terms and conditions - they have to give you a special arrangement so find out from them what it is, rather than just assuming based on what the regulator says they should be offering you.

I would be interested to hear from anyone who thinks my wife should not incur any financial penalty if she moves her money out of the Leeds BS 2yr FRISA, particularly as Bowlhead99 says, she has been rewarded with a higher rate of 2.1% by fixing the term and so some kind of penalty should be applied, otherwise it would be unfair to those savers who had forethought & didn't fix and got paid a lower rate.

I am someone who thinks your wife will not incur any financial penalty for moving the *excess* out, because it has been decreed at national level that she must be allowed to do that. But they are perfectly at liberty to charge a penalty if she wants to take *more* than that because if they did not, it wouldn't be fair on those with forethought.

Personally as a capitalist I would be happy if people moving their excesses out got penalised too, because it isn't the banks fault that the compensation level was reduced at a national regulator level, it is a risk you take when locking into the rate. But as a lower compensation level reduces the "insurance" cost for banks, they do benefit so I guess the "little-old-lady-friendly" approach of allowing people to get more protection, by moving their excesses scot free, is OK.

A very good point from Bowlhead99 and one I think the financial institutions may use to penalise those that choose to escape with any cash, held in fixed term accounts, above the new FSCS limit in 2016.

If you wait until 2016 to move money out you will risk exposure to banking calamity because you lose protection on the 75-85k chunk from Jan. In your personal case, as you say, you're fine with that. You also risk being denied a penalty free exit because at some point in the future the banks will argue your move out of the account was not a consequence of the protection reduction because the protection has been at the £75k level for ages.

KGriff

Thanks bowlhead99 and Colsten too, I have gained a lot from each of your comments.

It has been very informative and given me the incentive to look at our position a little closer than we did initially when we first learned about the FSCS limit change.

I guess every risk should be fully considered before taking a decision and we still have time to study this matter in detail. I will suggest to my wife we look at this matter again at the very least.

Thanks for all the help here, it is very much appreciated.