Does it pay to save abroad?

Bjork and sustainable cod aren’t the only good things to have come out of Iceland in recent years.

Some of the country’s largest banking institutions have been making a splash in the UK savings market.

First there was IceSave, part of Iceland’s Landsbanki group, which launched a top-paying online account a couple of years ago. This has recently been bettered by Kaupthing Edge – another Icelandic bank. It is offering savers 6.5 per cent on its leading instant access account.

And these aren’t the only foreign financial companies trying to attract British savers. The best buy tables are currently awash with exotic-sounding banks that you won’t find down your local high street.

These include FirstSave, part of the First Bank of Nigeria, paying 6.26 per cent; ICICI Bank, hailing from India, and paying 6.16 per cent on its Hi-Save account; Dutch banks ING Direct and AKBank AV plus the Bank of Ireland and the Anglo Irish Bank.

No-one is doubting that the rates on offer aren’t extremely attractive. But do these overseas banks offer the same security?

Until recently few people would have worried about how safe their money was in bank authorised to do business in the UK. But with the near collapse of a large US investment bank and the nationalisation of Northern Rock, it is not surprising that many people are worried about the security of their savings.

Of course, there is no evidence at all that any of these banks are likely to suffer financial problems in future. Indeed it goes without saying that bank collapses are extremely rare; and even when difficulties do arise – as in the case of Northern Rock or Bear Stearns – regulators and governments often step in to protect customers’ savings.

But those that want to make take a belt and braces approach should check whether any overseas bank is fully covered by the Financial Services Compensation Scheme (FSCS).

This is a Government-backed scheme that ensures that the first £35,000 deposited with any bank is guaranteed in the unlikely event that the bank goes under.

Remember, this is the total amount that will be paid per person, so anyone who has £35,000 in two accounts with the same bank would only receive the maximum £35,000. But if this money was deposited in two different banks then your money would be covered in full by the FSCS.

(There is one important caveat to bear in mind here. Many banks operate a number of different "brands" but only register the parent bank with the FSCS. This means that the maximum you will be protected for will be £35,000 across the group.)

But not all overseas banks are fully covered by the FSCS. Rather surprisingly it is those banks that are from the furthest flung corners of the globe that often the most watertight protection.

If a bank’s home country is outside the EU, then it must be fully authorised by the main regulator, the Financial Services Authority, if it wants to open a subsidiary operation in the UK.

This means that it will be full covered by the FSCS – so customers who save with ICICI and FirstSave for example have the same protection in place as those who bank with Barclays and Halifax.

The picture is a little murkier for some European-based banks. Some do seek full authorisation by the FSA, but others are simply covered by an equivalent- compensation scheme in their home country.

Kaupthing Edge, for example is fully covered by the FSCS, whereas IceSave, ING Direct and Anglo Irish Bank are primarily covered by their own local compensation schemes. In Iceland, for example, this will pay out significantly less than £35,000 in the event of a bank collapse.

However, IceSave (and the others listed above) have registered for top-up payments through the FSCS, which should ensure that UK savers would still receive a maximum of up to £35,000.

In theory this mean these savers will not be out of pocket (at least not if they have less than £35,000 in the bank). But in practice this will mean that savers face delays and additional paperwork in order to receive their due compensation.

But the Financial Services Authority warns that the situation with other European banks may be even worse, as some have registered with the FSCS, so customers will not get these top-up payments.

So how can you check whether you have the financial equivalent of a full safety net or a sticking plaster in the worst case scenario?

The first step is to look up your bank on the Financial Service Authority’s register. (www.fsa.gov.uk/register) This will show whether the bank is fully authorised in the UK or is authorised elsewhere in Europe (EEA authorised). If the latter is the case you then need also to check with the FSCS (www.fscs.org.uk) whether it has registered for top-up payments. If not, then you are probably advised to take your money elsewhere.

By Emma Simon

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