Recently I was updating an article on savings rates, when I noticed that virtually all of the banks paying the best interest rates were unfamiliar names. So how safe are banks you’ve never heard of?
How safe are banks you’ve never heard of?
The Northern Rock scandal has made us realise that even high street banks can run into serious trouble. But if you’ve never heard of a particular bank, would you put your savings in it – even if it is paying the highest interest rate?
I mentioned this on SavvyWoman’s Facebook page and had a mixed response. But most of those who commented did want to know more about these so-called ‘challenger’ banks. So here are some thoughts.
Is your money protected?
Firstly, all banks that are fully licensed in the UK have to be covered by the Financial Services Compensation Scheme (FSCS). This protects your savings up to a limit of £85,000 per person per bank. As I’ve said on quite a few articles on SavvyWoman; it’s a bit more complicated than that. If banks are members of a larger group that share a banking licence, that £85,000 limit applies to any savings you have across the whole group. Not all banks that are part of a larger group share a banking licence, so there’s no general rule to apply.
Although virtually all banks in the UK are fully authorised by the UK regulators, at the moment, one bank (Ikano Bank, owned by the family that set up Ikea) operates in the UK under so-called ‘passporting regulations’. Under EU rules, banks were able to do this where their parent company’s headquarters were in the European Economic Area (EEA). The EEA is made up of the EU plus Norway, Lichtenstein and Iceland.
These EU rules meant they can be licensed in their ‘home’ country, and can protect savings by being a member of their home country’s deposit protection scheme. This has a limit of €100,000 per person, which is pretty similar to the UK limit of £85,000.
SAVVY TIP: Ikano Bank says that any money you save with them is currently covered by the Swedish Deposit Insurance Scheme, up to a limit of £85,000 (the same as in the UK). When we leave the EU, Ikano Bank will be covered by the UK’s FSCS. If you want to find out about how money in Ikano Bank is protected, you can read more in their frequently asked questions.
If we leave the EU with a deal
If we leave the EU with a deal, there will be a transition period until the end of December 2020, during which time during which time banks would continue to be covered by the EU rules I’ve explained above.
If we leave the EU with a no-deal Brexit
If we leave the EU with a no-deal Brexit, these EU rules would not apply. So banks that want to operate in the UK would have to be fully licensed in the UK. Most banks that have a parent company within the EU have already changed their legal status so they can be fully regulated by the UK regulators.
As I mentioned above, Ikano Bank has said that if the UK leaves the EU without a deal, it will be covered by the FSCS. This means that your savings will be protected, up to a limit of £85,000, by the Financial Services Compensation Scheme.
How big is the FSCS safety net?
I guess the big question is ‘what happens if several large banks fail?’ Would the FSCS be able to cope? I have to be honest and say that I don’t know. I have no reason to think it wouldn’t be able to cope with any demand on its resources, but I haven’t looked into it closely enough to offer any guarantees or reassurance.
However, I think two things are worth pointing out. Firstly, the FSCS paid out over £20 billion in the autumn of 2008 when Bradford and Bingley, IceSave and London Scottish Bank went bust. It should be much better prepared now for the ‘unthinkable’ – because we’ve already been through it.
Secondly, it does have the ability to impose a higher levy on financial services firms if it needs to raise money to pay savers who’ve lost out. It doesn’t have a pot of money sitting there waiting to be claimed, but can effectively force the financial services industry to pay extra money if needed.
Who’s behind these banks?
Looking at the best buy tables, some of the banks that are currently paying the highest interest rates are owned by much larger banks, others are relatively new. Here are a few of the names that I’ve noticed in the best buy tables (in alphabetical order). All of these banks are protected by the Financial Services Compensation Scheme unless I’ve said otherwise.
Al Rayan Bank: This bank used to be called the Islamic Bank of Britain. It’s a Qatari owned bank that was set up in 2004. It provides Sharia-compliant banking and savings products to around 85,000 customers. Like all Sharia-compliant banks, it doesn’t pay interest, but what it describes as an ‘expected profit’.
What you need to know: Al Rayan Bank is reportedly being investigated by the FCA over concerns about anti-money laundering controls and the possibility that a small number of its clients may have links to Muslim extremist groups. Al Rayan Bank issued a statement and said it had agreed with the FCA – voluntarily – to place temporary restrictions on newly opened accounts of possible ‘politically exposed’ individuals. You can read its statement on its website.
TrustPilot rating: 4.1 out of 5, based on 225 reviews.
Arbuthnot Direct: This is an online only savings provider owned by Arbuthnot & Latham, which started out as a merchant bank in 1833 and later offered private banking services. Arbuthnot Direct was launched this year (2019). As it’s so new, it’s probably not surprising that I couldn’t find any reviews on TrustPilot for it.
SAVVY TIP: Raisin works in a similar way to investment platforms, in that you can keep savings from several different providers in the same place. Your money is protected by the bank you have your savings with, not by Raisin.
TrustPilot rating: I couldn’t find any for Axis Bank. Raisin gets 3.6 out of 5 from around 180 reviews.
Cynergy Bank: Cynergy Bank used to be known as the Bank of Cyprus UK. At the end of last year, it was sold to Cynergy Capital, and it rebranded as Cynergy Bank. Bank of Cyprus UK first started providing banking services in the UK in 1955.
TrustPilot rating: I can only find ratings for Bank of Cyprus UK, although some of them are from September so refer to Cynergy Bank. It’s rated 2.6 out of 5, but only based on 27 reviews.
FirstSave: This is the online savings arm of FBN Bank UK, which is a UK bank that is a wholly-owned subsidiary of the First Bank of Nigeria. First Bank of Nigeria UK started operating in the UK in 1982.
TrustPilot rating: I couldn’t find any ratings for FirstSave on TrustPilot.
What you need to know: Its accounts often get oversubscribed, and when that happens, FirstSave closes them to new customers. As I’m writing this, only some of its fixed rate savings accounts are open to new customers. Its easy access accounts and notice accounts are currently unavailable.
Habib Bank Zurich: This Swiss-owned bank started operating in the UK in 1974. In 2016, the UK bank became a wholly-owned subsidiary of the Swiss bank (rather than a branch). It has eight branches in the UK and – as I write this – offers two fixed rate savings accounts.
Marcus by Goldman Sachs: Marcus was launched last year, offering a straightforward interest rate of 1.5% on easy access savings. That rate has just been cut to 1.45%. As the name implies, Marcus is owned by Goldman Sachs, which is an American multinational financial services company.
TrustPilot rating: It’s rated as 3.5 out of 5, which is described as average. There are only 19 reviews so it really doesn’t tell you much about the bank. However, I did notice that a few of those who complained said their account had been locked with no explanation. I have no idea about what’s behind this, or if these are genuine reviews, but I thought I’d highlight it.
OakNorth Bank: It describes itself as a bank ‘by entrepreneurs for entrepreneurs’. It is UK based and was set up in September 2015. OakNorth Bank has over 55,000 savers and has lent around £3 billion.
TrustPilot rating: It’s rated as 3 out of 5, but based on only 10 reviews.
Sensible Savings: This is the savings brand name of The Access Bank UK. The Access Bank UK is a wholly-owned subsidiary of The Access Bank, which is one of Nigeria’s largest banks.
TrustPilot rating: I couldn’t find a rating for Sensible Savings on TrustPilot.
Zenith Bank UK: This may be an unfamiliar name, but it is owned by one of Nigeria’s biggest banks (Zenith Bank), which was founded in 1990. It’s currently sitting at or near the top of the best buy tables for fixed rate savings accounts lasting for between one and five years (but of course, that could change very quickly!).
TrustPilot rating: I couldn’t find any reviews on TrustPilot for it, although I could find reviews on the employee review website Glassdoor.
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