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Safety thirst

At the end of one of the most tumultuous weeks we have experienced in financial markets, the Financial Times’ Lex column stated on Friday September 19 that investors today are “more concerned about a return of capital than a return on capital”.

This seems to have been corroborated over the weekend that followed as a plethora of newspaper articles explored “safe” places to put your money. On the following Monday, TV’s Panorama programme looked at the safety of funds.

The main focus was not on equities versus cash, as many of the articles were evidently written before the record-breaking 8.8 per cent single-day increase in the FTSE 100 on Friday 19, but on the “safeness” of the investment wrapper or product. Given Lloyds TSB’s takeover of HBOS, much attention was placed on the Financial Services Compensation Scheme’s maximum £35,000 guarantee per banking entity when there is a merger. The amount of the guarantee available to depositors with accounts with separate banks within the same group will depend on the facts.

Little was mentioned in these articles about the FSCS guarantee for investors in long-term insurance business, however. This currently stands at:

  • 100 per cent of the first £2,000.

  • 90 per cent of the balance of the policy value in liquidation with no limit.

    In practice, the first course of action would be for the policies to be continued by being transferred to another company or by assistance to the company in financial difficulty. Ninety per cent of future benefits would be guaranteed under the continuing policies.

    The comparative guarantee for investment funds is 100 per cent of the first £30,000 and 90 per cent of the next £20,000 – effectively, a guarantee of £48,000.

    Offshore investors need to ascertain the compensation arrangements for the relevant jurisdiction under consideration.

    As an example, the Isle of Man, home to many offshore insurers promoting insurance products into the UK, appears to offer similar protection for its policyholders as does the UK.

    Going into a little more detail, the main provisions of the FSCS in relation to deposits, investment funds and long-term life insurance contracts are set out below.

    When is the FSCS triggered?

    The FSCS is triggered in respect of deposits, investment funds and long-term insurance as follows:

    Deposits
    The FSCS is triggered when an authorised deposit taker, such as a bank, building society or credit union, is unable or likely to be unable to repay its depositors. Joint account holders are each entitled to claim compensation.

    Investments
    The FSCS provides protection if an authorised investment firm is unable to pay claims against it, for example:

  • For a loss arising from bad investment advice, poor investment management or misrepresentation,

  • When an authorised investment firm goes out of business and cannot return investments or money.

    The FSCS only pays compensation for financial loss. Investments covered include stocks and shares, unit trusts and futures and options.

    Long-term insurance including pensions and life insurance
    Policyholder protection is triggered if an authorised insurer is unable or likely to be unable to meet claims against it, for example, if it has been placed in provisional liquidation or administration.

    Maximum levels of compensation under the FSCS are:

    Deposits
    £35,000 per person for claims against firms declared in default from October 1, 2007. This is represented by 100 per cent of the first £35,000. In July, the Government published a consultation paper on financial stability and depositor protection which proposed increasing the limit to £50,000. Responses to this consultation were requested by September 15 and in view of the recent turmoil in financial markets, the number of responses is likely to be above average.

    Depositors may still receive a share of their savings above £35,000 following any distribution of assets as part of the insolvency process for a failed bank. This would be a matter for the insolvency practitioner to determine and any recovery would vary according to the circumstances of the failure.

    Investments
    £48,000 per person. This is arrived at by protection of 100 per cent of the first £30,000 and 90 per cent of the next £20,000.

    Long-term insurance including pensions and life insurance
    Unlimited protection. This is arrived at by protection of 100 per cent of the first £2,000 plus 90 per cent of the remainder of the claim if compensation is paid in cash or 90 per cent of future benefits if the policy continues, which is more likely).

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