Insure over FSCS limit?

masonic

GeoffTF said:

masonic said:

GeoffTF said:

The FSCS is industry funded, and the government has refused to stand behind the scheme.

The government stands behind the scheme, but only to the extent that when there is a shortfall, the treasury will print the money required and loan it to the scheme.

The government has done so in the past. The FSCS  says "Set up by the government, we’re independent and our service is free to use":

https://www.fscs.org.uk/

If you believe that the government has guaranteed to meet any future shortfall in the fund, please provide a link. If so, the government's liability would be capped at £85K per account. An insurer would have no such cap. Insurance makes sense when there are lots of claims, and the average payout is known. It is difficult to provide insurance against an event which has never happened (a massive loss to fraud) but would be ruinously expensive if it did.

gravel has given a summary. It is also set out in section 223B of the Financial Services and Markets Act. I'd be interested in your view as to whether the Treasury may in practice refuse to fund legitimate consumer claims up to the FSCS limit should the scheme run out of funds.

gravel_2

Suspect only systemic bank failures would truly stress FSCS, in which case alternative mechanisms will be deployed, at the expense of the investors (you).

https://www.bankofengland.co.uk/paper/2021/executing-bail-in-an-operational-guide-from-the-boe

masonic

gravel_2 said:

Suspect only systemic bank failures would truly stress FSCS, in which case alternative mechanisms will be deployed, at the expense of the investors (you).

https://www.bankofengland.co.uk/paper/2021/executing-bail-in-an-operational-guide-from-the-boe

AIUI, the levy is set based on the "expected" claims the scheme may encounter over the following year and any money it owes from previous payouts. Then it has the credit facility you mentioned. A small savings bank failure would be unlikely to put it under much strain. Failure of a big bank might. There would likely be a domino effect in such a situation anyway, but it would be unsatisfactory in the extreme if savers in a high street bank couldn't rely on the FSCS having enough access to funds to meet their claims under the scheme.

GeoffTF

masonic said:

GeoffTF said:

masonic said:

GeoffTF said:

The FSCS is industry funded, and the government has refused to stand behind the scheme.

The government stands behind the scheme, but only to the extent that when there is a shortfall, the treasury will print the money required and loan it to the scheme.

The government has done so in the past. The FSCS  says "Set up by the government, we’re independent and our service is free to use":

https://www.fscs.org.uk/

If you believe that the government has guaranteed to meet any future shortfall in the fund, please provide a link. If so, the government's liability would be capped at £85K per account. An insurer would have no such cap. Insurance makes sense when there are lots of claims, and the average payout is known. It is difficult to provide insurance against an event which has never happened (a massive loss to fraud) but would be ruinously expensive if it did.

gravel has given a summary. It is also set out in section 223B of the Financial Services and Markets Act. I'd be interested in your view as to whether the Treasury may in practice refuse to fund legitimate consumer claims up to the FSCS limit should the scheme run out of funds.

I do not think it is at all likely. The main risk is to funds above the FSCS limit. Compensation within the FSCS limit is just an interesting aside. I am reassured on that. Above the FSCS limit, there is not much that we can do except stick to the most reliable looking platforms. Some spread of risk is prudent, but that approach has limitations with a multi-million pound portfolio. Big shortfalls at Vanguard? There is not much that we can do to mitigate that.

masonic

GeoffTF said:

masonic said:

GeoffTF said:

masonic said:

GeoffTF said:

The FSCS is industry funded, and the government has refused to stand behind the scheme.

The government stands behind the scheme, but only to the extent that when there is a shortfall, the treasury will print the money required and loan it to the scheme.

The government has done so in the past. The FSCS  says "Set up by the government, we’re independent and our service is free to use":

https://www.fscs.org.uk/

If you believe that the government has guaranteed to meet any future shortfall in the fund, please provide a link. If so, the government's liability would be capped at £85K per account. An insurer would have no such cap. Insurance makes sense when there are lots of claims, and the average payout is known. It is difficult to provide insurance against an event which has never happened (a massive loss to fraud) but would be ruinously expensive if it did.

gravel has given a summary. It is also set out in section 223B of the Financial Services and Markets Act. I'd be interested in your view as to whether the Treasury may in practice refuse to fund legitimate consumer claims up to the FSCS limit should the scheme run out of funds.

I do not think it is at all likely. The main risk is to funds above the FSCS limit. Compensation within the FSCS limit is just an interesting aside. I am reassured on that. Above the FSCS limit, there is not much that we can do except stick to the most reliable looking platforms. Some spread of risk is prudent, but that approach has limitations with a multi-million pound portfolio. Big shortfalls at Vanguard? There is not much that we can do to mitigate that.

You can only ever expect to receive compensation up to the limit, and there is plenty of precedent for small numbers of investors losing out because they lost more than £85k in the past (as you allude, mainly because of where they invested and what they invested in). It is sensible to take reasonable steps to ensure your individual loss is limited. Whereas I simply cannot envisage a situation where savers or investors with losses below the FSCS limit are hung out to dry by the Treasury declining to provide the FSCS with the money it needed to go on functioning. The consequences would be fairly spectacular I would think.

Imagine the 30 million customers of Lloyds Banking Group being told their savings were gone and the FSCS could only afford to pay the first few thousand of each claim. Or an investment firm wiping out the resources of the FSCS, so it was no longer there for any subsequent failures.

GeoffTF

masonic said:

GeoffTF said:

masonic said:

GeoffTF said:

masonic said:

GeoffTF said:

The FSCS is industry funded, and the government has refused to stand behind the scheme.

The government stands behind the scheme, but only to the extent that when there is a shortfall, the treasury will print the money required and loan it to the scheme.

The government has done so in the past. The FSCS  says "Set up by the government, we’re independent and our service is free to use":

https://www.fscs.org.uk/

If you believe that the government has guaranteed to meet any future shortfall in the fund, please provide a link. If so, the government's liability would be capped at £85K per account. An insurer would have no such cap. Insurance makes sense when there are lots of claims, and the average payout is known. It is difficult to provide insurance against an event which has never happened (a massive loss to fraud) but would be ruinously expensive if it did.

gravel has given a summary. It is also set out in section 223B of the Financial Services and Markets Act. I'd be interested in your view as to whether the Treasury may in practice refuse to fund legitimate consumer claims up to the FSCS limit should the scheme run out of funds.

I do not think it is at all likely. The main risk is to funds above the FSCS limit. Compensation within the FSCS limit is just an interesting aside. I am reassured on that. Above the FSCS limit, there is not much that we can do except stick to the most reliable looking platforms. Some spread of risk is prudent, but that approach has limitations with a multi-million pound portfolio. Big shortfalls at Vanguard? There is not much that we can do to mitigate that.

Imagine the 30 million customers of Lloyds Banking Group being told their savings were gone and the FSCS could only afford to pay the first few thousand of each claim. Or an investment firm wiping out the resources of the FSCS, so it was no longer there for any subsequent failures.

In that scenario, the total loss would be £2.5 trillion if they all had £85K deposited. Of course they will not. 9% have savings of more than £100K:

https://www.kantarmedia.com/news-and-resources/extreme-savers

So the potential tab for the government could be as much as £200 billion. We have all seen the fuss that they are making about shortfall a tenth of that. I am not confident that they would pay up in full, but I think that scenario is very unlikely indeed.

masonic

GeoffTF said:

masonic said:

GeoffTF said:

masonic said:

GeoffTF said:

masonic said:

GeoffTF said:

The FSCS is industry funded, and the government has refused to stand behind the scheme.

The government stands behind the scheme, but only to the extent that when there is a shortfall, the treasury will print the money required and loan it to the scheme.

The government has done so in the past. The FSCS  says "Set up by the government, we’re independent and our service is free to use":

https://www.fscs.org.uk/

If you believe that the government has guaranteed to meet any future shortfall in the fund, please provide a link. If so, the government's liability would be capped at £85K per account. An insurer would have no such cap. Insurance makes sense when there are lots of claims, and the average payout is known. It is difficult to provide insurance against an event which has never happened (a massive loss to fraud) but would be ruinously expensive if it did.

gravel has given a summary. It is also set out in section 223B of the Financial Services and Markets Act. I'd be interested in your view as to whether the Treasury may in practice refuse to fund legitimate consumer claims up to the FSCS limit should the scheme run out of funds.

I do not think it is at all likely. The main risk is to funds above the FSCS limit. Compensation within the FSCS limit is just an interesting aside. I am reassured on that. Above the FSCS limit, there is not much that we can do except stick to the most reliable looking platforms. Some spread of risk is prudent, but that approach has limitations with a multi-million pound portfolio. Big shortfalls at Vanguard? There is not much that we can do to mitigate that.

Imagine the 30 million customers of Lloyds Banking Group being told their savings were gone and the FSCS could only afford to pay the first few thousand of each claim. Or an investment firm wiping out the resources of the FSCS, so it was no longer there for any subsequent failures.

In that scenario, the total loss would be £2.5 trillion if they all had £85K deposited. Of course they will not. 9% have savings of more than £100K:

https://www.kantarmedia.com/news-and-resources/extreme-savers

So the potential tab for the government could be as much a £200 billion. We have all seen the fuss that they are making about shortfall a tenth of that. I am not confident that they would pay up in full, but I think that scenario is very unlikely indeed.

The ONS Assets and Wealth survey (2022) has figures for the deciles of median household net financial wealth, these are £0, £500, £1000, £2000, £6800 (median), £12900, £22900, £41800, £201000. These are for households not individuals, so that will lead to an overestimation. Not all of it will be in savings, and there will be some debt netted away, but also customers may have debt and savings with the same institution that could be offset. That said, I don't think these are unreasonable figures to use for a rough estimate...

So if all of the money from the banking group was gone/tied up in the special administration and assuming customers held all of their savings with this group, it would cost the FSCS an initial outlay of £132bn to compensate up to the median savings figure above of £6800 (0*0.1+500*0.1+1000*0.1+2000*0.1+6800*0.6)*30 million. But only £46bn if they drew the line at £2000, and somewhere north of £250bn if they stuck to the compensation limit. So it might at first glance look very tempting to shaft the higher deciles by capping compensation below the £85k limit. Perhaps they could reduce the cost by 2-5 fold.

However, if news broke out in the evening that some savers weren't going to be getting their money back even though they didn't exceed the compensation limit (and the media would have a field day with that), then the next morning there would likely be a run on every other UK bank. Even a large figure like £250bn is not even a fifth of the total held in savings across financial institutions in the UK. Share price of other banks would likely plunge, perhaps other UK firms too, bond yields would spike, the pound would plunge in forex markets. I imagine the financial system and government would break down in the following days if the decision wasn't reversed swiftly.

By comparison, the cost of the 2008 banking crisis interventions was around £140bn (over £200bn in today's money) and Covid cost somewhere between £300-400bn. So they might need to once again break some fiscal rules in order to have an economy to manage in the future.

jd84

In 2007, only the first £2,000 of savings were protected, with 90% of the next £33,000 so £31,700.

When crises hit, this was increased to 50k and I seem to remember the gov then saying all deposits would be covered, even over these limits, in order to try and stop the bank runs.

Those bail in rules didn't exist back then, and we also now have ring fencing, so can't rely on the same outcome next time around, although I'm sure things would have to be catastrophic if ordinary people started losing money.

It does make me wonder whether investors would be thrown to the wolves though. A large global index fund should in theory be safer than a niche ETF domiciled abroad, but as with life, there are no guarantees except for death and taxes.

masonic

jd84 said:

In 2007, only the first £2,000 of savings were protected, with 90% of the next £33,000 so £31,700.

When crises hit, this was increased to 50k and I seem to remember the gov then saying all deposits would be covered, even over these limits, in order to try and stop the bank runs.

Those bail in rules didn't exist back then, and we also now have ring fencing, so can't rely on the same outcome next time around, although I'm sure things would have to be catastrophic if ordinary people started losing money.

It does make me wonder whether investors would be thrown to the wolves though. A large global index fund should in theory be safer than a niche ETF domiciled abroad, but as with life, there are no guarantees except for death and taxes.

It was the Icesave failure that triggered the government's decision to cover all deposits. This was an unusual case because FSCS protection didn't even apply to Icesave - it had 'passported' protection from the even less generous Icelandic protection scheme, which had decided to renege on its promise to non-Icelandic nationals. Having had a few thousand in an Icesave savings account myself, I was very grateful to the then chancellor Alistair Darling for the decision to wrap us in FSCS protection, but I could see that there were multiple other savings banks utilising passported depositor protection, so it probably made sense to avoid putting those institutions at risk of a run on their deposits too. I can't say I fully understand the reasoning behind making the unlimited guarantee. Passport protection no longer exists today, and I believe banks marketing to UK consumers need to register a UK entity with the FSCS and pay into the scheme. If not a requirement, in practice that's what all of them seem to do.

For investments, I think there is an argument that protection is higher than it needs to be, given what we know from multiple failures and administration costs of these. There is no requirement for protections for investments and deposits to be aligned and in most European countries they are not and never have been. Having a high limit for investments has had the effect of lending credibility to small dodgy providers. Perhaps a good thing from the standpoint of competition in the market, but these are the providers that will generate high per-customer losses. We've had Beaufort, SVS and now WealthTek where regulation has failed and investors exposed to risks they would not have had if they'd stuck to the mainstream. Plus lots of other smaller providers failing that don't generate as much publicity. So that does put a burden on the FSCS that perhaps needn't be there.

If the limit was to be made less generous, the time to do it would be in advance of a major failure. Doing it retrospectively would knock confidence in the scheme's guarantee to depositors. The economy requires a high level of confidence in our fractional reserve banking system in order to function, as if customers start withdrawing money en masse, banks will be unable to meet their obligations, and the whole system is put at risk.

GeoffTF

masonic said:

For investments, I think there is an argument that protection is higher than it needs to be, given what we know from multiple failures and administration costs of these.

It was unlimited under the old stock exchange scheme, but became limited when that was replaced by the FSCS. Broker commissions were eye watering high in those days though, and once you had been given a valid certificate, their liability ended. You were not completely safe with a bundle of certificates in you drawer either.