‘Should I entrust foreign banks with my savings?’
As savings rates have diminished over the last few years, challenger banks have risen to the top of the best buy tables. These are smaller, newer names to the market trying to take on the big, established players.
These institutions need to raise their profile and importantly, still need to raise funds from savers, unlike major British high street banks, which received access to cheap funding from the government in 2012 so no longer need to rely on customer deposits to fund lending.
Some challengers are British such as Metro, Virgin Money and Aldermore. Others are foreign like French-owned RCI Bank and Swedish Ikano Bank, which was founded by the family behind Ikea.
Andrew Hagger of Moneycomms says: “Just because you’ve never heard of a bank it doesn’t mean you should immediately dismiss it out of hand.”
However, he says safety of funds is vitally important to most savers “so check if the provider in question is covered by the [UK] FSCS – Financial Services Compensation Scheme”.
The FSCS guarantees to repay up to £75,000 per person within seven days if a bank, building society or credit union goes bust.
According to Anna Bowes of independent savings adviser SavingsChampion.co.uk, the majority of the foreign banks have made a commitment to the UK market and as a result are part of the UK FSCS. Deposits with the Bank of Cyprus UK, for example, are covered.
However, some, such as RCI Bank and Ikano, are part of their own country’s compensation scheme.
“These providers protect their savers on up to €100,000 and will pay any compensation out in euros – therefore the sterling equivalent protected will be determined by the prevailing exchange rate and any fees for transferring funds back into sterling,” she says.
Bowes believes the key to feeling secure when placing funds with a bank or building society, especially one you have never heard of, is that the funds are fully protected should the provider fail.
“As a result, especially with regard to those providers who are protected by the UK FSCS, there is no reason not to at least consider using them, as long as you keep your deposit within the limits,” she says.
Hagger, however, says he’d be “wary of putting my money” with overseas institutions covered by their own country’s scheme because of the time it may take to get your money back.
“For the sake of an extra 0.1% or 0.2% I’d plump for a UK FSCS backed provider every time,” he says.
“As a yardstick I always ask myself, would I be comfortable letting my parents put their nest egg with a particular unfamiliar savings provider. If the answer is no, then I won’t put my cash with it either.”