FINANCIAL SERVICES COMPENSATION SCHEMES: A PRIMER

 In an independent Scotland, depositors in banks would enjoy exactly the same sort of protection in the event of a bank collapse as they do now in the UK. That is a statement of the obvious. I’m only bothering to post a blog about it now in response to a story by Eddie Barnes and Tom Peterkin, and headlined ‘Scottish independence must cover risk to savers’, published in Scotland on Sunday on 26th May. You can see the article here: http://www.scotsman.com/scotland-on-sunday/scottish-independence-must-cover-risk-to-savers-1-2944827

For anyone who knows much about financial services regulation, the Scotland on Sunday piece certainly doesn’t merit the description of ‘news’; but it might raise doubts over independence in the minds of less well-informed readers. In fact, it’s an anti-independence scare story that shouldn’t have been given house room in what purports to be a serious newspaper.

The thrust of the article was that bank account deposits would be at risk in an independent Scotland unless a new government set up its own guarantee scheme; that this ‘highlighted a further financial challenge an independent Scotland would face’; and that the source of this ‘warning’ had come from  ‘the head of the UK’s most influential financial compensation body’. Let’s look at these points in turn.

It’s actually perfectly true to say that bank account deposits would be at risk in an independent Scotland, unless a new government set up its own guarantee scheme: but only in the sense that it’s also true to say that there would be a risk of plane crashes if we didn’t have an air traffic control system, or an increased risk of crime if we didn’t have a police force.  That isn’t news; it’s simply a statement of the bleeding obvious. All developed economies, and many developing ones, have such schemes.  At least the article had the good grace to quote a Scottish Government source as saying that an independent Scotland will have a deposit guarantee scheme, but it’s odd that Scotland on Sunday had to ask the question in the first place.

But what about the ‘further financial challenge an independent Scotland would face’, given that the article also says that EU directives are clear that member states ‘must be able to finance those (compensation) arrangements’? Well, there’s no problem there. The existing UK Financial Services Compensation Scheme (FSCS) isn’t funded by the taxpayer, but is rather funded by levies on banks and other financial services firms. Each firm funds the scheme in proportion to the number of customers it has. A Scottish scheme could be funded in exactly the same way, so the money that banks currently pay into the UK scheme in respect of their Scottish customers would simply instead be paid into a new Scottish scheme. That’s not rocket science. And, en passant, a new Scottish scheme would have a claim on a proportion of any assets held by the UK scheme.

And now let’s look at the apparent source for many of the quotes in the article, a certain Mark Neale, ‘head of the UK’s most influential financial compensation body’. To the uninitiated, this might sound like some objective, independent third party – and a pretty heavy hitter at that. Call me naive, but I’d have thought that two senior, experienced journalists on ‘Scotland’s national newspaper’ would have known, or could least have checked to spot that the Financial Services Compensation Scheme is the UK’s only such body. Now I don’t know Mark Neale and have nothing against him personally, but as there’s only one such organization in the UK, Scotland on Sunday could equally have described him as ‘head of the UK’s least influential financial compensation body’. And as for his apparent independent, third party status, the FSCS website will tell you that although it’s ‘impartial and independent’, dig a bit deeper, and you’ll also see that under the Financial Services & Markets Act 2000 (FSMA), the UK regulators (FCA and PRA) appoints its directors, and that ‘FSCS is independent from the UK regulators, although accountable to it and ultimately to the Treasury’. So rather than being some entirely objective third-party commentator, Mr. Neale is de facto a UK civil servant, whose job it is to carry out the orders of the UK Chancellor. All I can say to that is: ‘McCrone’.

There are lots of questions that people wondering how to vote in 2014 should ask themselves. “Will my savings be safe in the event of a bank collapse?” isn’t one of them.

And for those wanting to do some further reading, the UK FSCS website can be found here: http://www.fscs.org.uk/

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