Savers with deposits in some foreign banks operating in the UK were this week given a sharp reminder that, in the unlikely event of a bank defaulting, they would not be entitled to the maximum £35,000 compensation payable to savers with UK banks.

Savers with certain European-based banks would first have to seek compensation from the deposit guarantee scheme operating in the bank’s home state. Only after gaining the maximum available from that scheme could they apply to the UK scheme for a top-up to the £35,000 level. Savers with other European banks would not be entitled to any top-up compensation if their bank had not signed up and contributed to the UK scheme.

In evidence to the Treasury Select Committee on Wednesday a spokesman for the Financial Services Compensation Scheme (FSCS), the UK scheme, said 12 banks based in the European Economic Area (the 27 EU countries, plus Iceland, Norway and Liechtenstein). had signed up for the savings top-up.

They were: Bank of Ireland, Anglo Irish Bank, Merrill Lynch International Bank (from Ireland), TD Waterhouse Bank, ING Direct, Triodos Bank and Akbank (from the Netherlands), Bank of Cyprus and Marfin Popular Bank (from Cyprus), Landsbanki Islands and Kaupthing Bank (from Iceland) and Fortis Bank (from Belgium).

Savers with these 12 banks would, in the event of a default, seek initial compensation from the schemes operating in the bank’s country of origin. For example savers with Landsbanki, which holds more than £5 billion of UK savers’ money, would first apply to the Icelandic Depositors’ and Investors’ Guarantee Fund, which covers the first £16,500 of deposits. Only after receiving that would they be entitled to seek a top-up from the FSCS, with a maximum payout of £18,500 to bring them up to the FSCS’s ceiling of £35,000. Confusingly, although Kaupthing has signed up for the top-up it is already fully covered by the FSCS scheme through its UK-based company Kaupthing Singer & Friedlander.

Savers with other EEA-based banks which have not signed up for the top-up would receive nothing from the FSCS but would have to rely solely on the deposit guarantee scheme in the bank’s home state.

The Times has already raised the question of how solid these deposit guarantee schemes are. For example the Icelandic scheme has just £88 million in the kitty to cover deposits totalling £13.6 billion. Although many schemes don’t have much tucked away and rely on the prospect of additional contributions from member banks or a top-up from the Government there is the possibility that some might be overstretched in the event of a default. To put it in perspective, the value of deposits covered by the Icelandic scheme, at £13.6 billion, is about twice Iceland’s entire Gross Domestic Product (GDP).

In principle, savers with banks based outside the EEA should be in a simpler position. If the banks are on the list of those authorised to operate here by the Financial Services Authority, the City watchdog, they qualify for the full FSCS scheme and so savers are covered for the maximum £35,000. However some banks may try to operate without authorisation so before depositing any money with them savers should check the credentials of any bank with the FSA. The FSA holds a list of authorised banks on its website at www.fsa.gov.uk and you can also ring the FSA helpline on 0845 606 1234.

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