How to bulletproof your money in a banking crisis

The threat of a new banking crisis raises the question: just how safe are my savings?

The International Monetary Fund warned yesterday that the risk of severe financial system turmoil has “increased rapidly” in the last six months due to high interest rates and recent turbulence in the banking sector. 

Fears over financial stability have been growing ever since the collapse of two high-profile, overseas banks in March. 

The sudden fall of Silicon Valley Bank in the US, shortly followed by the emergency sale of Credit Suisse, rocked global markets as investors feared the advent of a new banking crisis.

Deposit holders of SVB’s £6.7bn UK subsidiary were left wondering whether their money was in trouble, before HSBC swooped in to buy the business.

Tech-focused lender SVB’s reliance on an industry which has seen funding dwindle and valuations tumble paved the way to its downfall, while Credit Suisse had long been weighed down by scandals and management reshuffles. 

None the less, the scale of these failures has reminded people of the institutions left behind after the 2008 financial crash, even if banking regulations have since tightened.

Jamie Smith, a financial adviser at Foster Denovo, said a couple of his clients have contacted him over SVB’s collapse and asked him how it could impact them.

“My response has been to remind them that their money, even their cash savings, carry risk,” he said.

“Back in the credit crunch, there was a systemic thaw in the banking system. This could happen again. But the capital cushions banks now have made this less likely.”

Don’t get caught out on banking licences

The noughties crash gave rise to a swathe of fintech startups, many of which still piggyback off banking licences which are not their own.

This is very important when it comes to the Financial Services Compensation Scheme (FSCS), which insures individual customer deposits up to £85,000, and joint accounts up to £170,000.

As Daniel Wood, a financial planner at 7IM, explained: “There’s a big risk people aren’t aware of, and that is that FSCS protection only applies per banking licence.”

In other words, if you have over £85,000 in cash deposited across multiple companies, but they use the same banking licence, you are only insured up to the first £85,000 – even if they are completely different companies.

Mr Wood used the example of HSBC and First Direct. But the rule can also apply to fintech startups, many of which simply have not been able to raise the investment capital to embark on the laborious journey of securing a licence.

“The licences they use should be highlighted a lot higher up on their websites, especially by fintechs where it can take just minutes to open an account,” said Mr Wood.

For those wondering how they can find out this information, Mr Wood said banks should have a section explaining whose banking licence they use.

If they do not, customers should find this out before opening an account to avoid falling foul of FSCS rules later on.

One way savers can do this is by using the FSCS’s bank and savings protection checker. Nick Lambert, director at financial advice firm Progeny, said this will show deposit holders how protected their cash is, and they can do the same with pensions and investments.

NS&I – unless the UK fails, you’re good

An “obvious choice” for those who want complete peace of mind is the state-owned savings bank NS&I, according to Mr Lambert.

“Here, all your money is totally secure as it is a government savings bank, with the backing of HM Treasury,” said Mr Lambert.

Or as Mr Wood put it: “Unless the UK completely fails, you’ll get your money back from this.”

But as is often the case, with more peace of mind come less returns. The odds of your numbers coming up on the Premium Bonds is 24,000 to every £1 in bonds, and if you do win the average annual return is 3.3pc.

Meanwhile, Atom Bank is offering a 4.5pc one-year fixed saver, and Secure Trust Bank an 18-month fixed cash ISA with a 4.15pc interest rate.

Beating inflation

With inflation unusually high – sitting at 10.4pc in February versus 6.2pc a year earlier – it can be tempting to switch and swap accounts in order to secure the best rate.

This can be hard to keep track of. Mr Smith, of Foster Denovo, said he advises clients not to put all their eggs in one bank, particularly their cash savings. 

“A lot of cash savings means a lot of opening and closing accounts. We suggest using a cash management service,” said Mr Smith.

Examples include Insignis and Flagstone, which allow customers to spread their cash across different accounts, benefiting from different interest rates all the while staying within the FSCS protection limits.

However, the flipside of this is that these management companies will take a percentage of your returns. Flagstone’s management fee is 0.15pc-0.25pc depending on your account size, with a minimum opening balance of £50,000.

“It’s a good solution for those with larger amounts of funds,” said Mr Smith.

“It’s also worth pointing out that these services don’t use trustee or nominee accounts, so you still hold the funds, not a third-party. But make sure you check their fee structures.”

For those clients keen to invest over £85,000 to benefit further from competitive rates, the London-based adviser said: “I always say what’s more important – having peace of mind, or risking your money in the event that the firm defaults? 

“I had one client considering taking on unnecessary levels of risk for a 9pc return, when they only needed the 4pc returns of a savings account.”