FSCS protection - Sharia accounts

skray

Hi

Notice account at www.moneysavingexpert.com: Bank Name BLME

 

Is any guidance available how FSCS protection applies to Sharia accounts that does not pay interest but "expected profits". 

Is the principal amount guaranteed at least.

According to the bank's website these profits are taxed as interest income rather than capital gains. (As per taxationweb as well this is alternative finance return, so taxed as interest).  But technically these are investments whose price can go up an down - so what does FSCS protection cover, does it cover the principal amount, profit or none. 

e.g. for Stocks and Share ISA, these are also FSCS protected, but FSCS will not compensate if price goes down in the same way it will compensate Cash ISA.

Thanks in advance.

Daliah

They are handled like normal savings account when it comes to FSCS. They are a lot more akin to savings accounts than to investments as your principal cannot be lost if you stay under £85K.

Not sure, though, what would happen with the expected profit. Perhaps you could ask FSCS and share their answer here?

The profits are taxable income but not taxed by BLMS. They get paid gross and count towards your personal savings allowance, like interest on savings account.

ColdIron

These are cash deposit accounts so work the same as non-sharia ones

Think about it. When you give cash to a bank they don't put it in a hole in the ground and post guards around it. Banks lend your money out to SMEs, mortgage holders etc and these underlying investments are also at risk of default etc but your money is still protected

https://www.which.co.uk/money/savings-and-isas/savings-accounts/islamic-finance-and-sharia-compliant-savings-alhx17u0bftz#headline_4

Daliah

ColdIron said:

These are cash deposit accounts so work the same as non-sharia ones

Think about it. When you give cash to a bank they don't put it in a hole in the ground and post guards around it. Banks lend your money out to SMEs, mortgage holders etc and these underlying investments are also at risk of default etc but your money is still protected

https://www.which.co.uk/money/savings-and-isas/savings-accounts/islamic-finance-and-sharia-compliant-savings-alhx17u0bftz#headline_4

Yes, but when a savings provider goes bust,  "it is common for the FSCS to include in the compensation payment interest on the financial product up until the date that the bank was declared to be in default or if appropriate, up to the date of maturity of a fixed term deposit".

The question remains whether it is also "common" for FSCS to pay an expected profit rate on the same basis.

skray

Hi Daliah & ColdIron

Thanks for your response. I believe the capital is at least protected because the bank website is openly claiming the product is FSCS protected. My question is partly academic - I think FSCS will compensate if bank goes bust while owing the customer money.

For Cash ISA this means both principal and interest.

But Stock and Shares ISA - if original investiment is £100 - the the share price falls to £90 - then if the bank goes bust FSCS will probably pay £90 because that is what the bank owes you.

In case of Sharia Notice account - what does the bank owe you? If it is as if the bank is taking a loan from you - then FSCS protection will apply at least on the original loan amount. But if it is technically an investment type of account - then the price can go down because of poor performance of the investiment - then the bank owes you only what the investment is worth at any point in time which can be less than the original investment amount.

(May be I am over thinking)

Thanks

wmb194

It's all sophistry: expected profit is interest. These are normal deposit accounts and, precisely the same as any other savings account, you declare your 'profit' to HMRC as interest. 

The amount you deposited would be covered but in the case where one of these went bust I guess the bank could declare that no 'profit' was earned and so it wouldn't be paid by the FSCS as there would be nothing to pay...

If these were actually at-risk investments they'd be structured differently e.g., as some type of debenture where the principal can be repaid in full at the end of the term but the 'profit' can be varied and paid as a dividend but of course the FSCS' deposit protection wouldn't apply.

masonic

skray said:

Hi Daliah & ColdIron

Thanks for your response. I believe the capital is at least protected because the bank website is openly claiming the product is FSCS protected. My question is partly academic - I think FSCS will compensate if bank goes bust while owing the customer money.

For Cash ISA this means both principal and interest.

But Stock and Shares ISA - if original investiment is £100 - the the share price falls to £90 - then if the bank goes bust FSCS will probably pay £90 because that is what the bank owes you.

In case of Sharia Notice account - what does the bank owe you? If it is as if the bank is taking a loan from you - then FSCS protection will apply at least on the original loan amount. But if it is technically an investment type of account - then the price can go down because of poor performance of the investiment - then the bank owes you only what the investment is worth at any point in time which can be less than the original investment amount.

(May be I am over thinking)

Thanks

It would cover the capital and any interest (profit) they are obliged to pay you. A Sharia account is obliged to pay you any interest that has already accrued, but there is no obligation to future interest at a given rate because they are permitted to change that. Where you might see a difference is in a fixed-term account, where a normal savings account could be run out to maturity if desired for full interest, whereas a Sharia fix could be treated more like a variable rate account and have no option to run to maturity. This would be equivalent to the scenario where the Sharia provider contacts you to let you know the profit is changing to 0% and you are free to break the fix if not satisfied with that new rate.

Albermarle

But Stock and Shares ISA - if original investiment is £100 - the the share price falls to £90 - then if the bank goes bust FSCS will probably pay £90 because that is what the bank owes you.

In a S&S ISA, your money is not actually with  the ISA provider, but in the investments in the ISA . So for example if HSBC went bust as a bank, if you had your money in a HSBC S&S ISA for example, it should be totally separate from any problems the bank was having. That would be the theory anyway.

Aretnap

wmb194 said:

It's all sophistry: expected profit is interest. These are normal deposit accounts and, precisely the same as any other savings account, you declare your 'profit' to HMRC as interest. 

Can't remember who said it but:

You might persuade God that it's not interest, but the taxman is not so easily fooled.

eskbanker

Aretnap said:

wmb194 said:

It's all sophistry: expected profit is interest. These are normal deposit accounts and, precisely the same as any other savings account, you declare your 'profit' to HMRC as interest. 

Can't remember who said it but:

You might persuade God that it's not interest, but the taxman is not so easily fooled.

I've reposted it a few times but to the best of my knowledge it was @poppy10_2 who first posted the elegant phrase "Allah won't class it as interest but HMRC will":

https://forums.moneysavingexpert.com/discussion/comment/75688627/#Comment_75688627

Bigwheels1111

I keep below just the FSCS limit, leaving enough room for a months interest.
Once paid I draw out interest payment and save it elsewhere.
If Al Ryan went under I believe I would get my months interest payment back also.
When I take out a 5 year fixed in a few months I will go for annual payout and I will only fund it with 80k.
If rate is say 5%, and they went under I would get 84K if a year down the line, as such keeping below the 85k limit.