Compensation Levels Up

Hannah Beecham  Wednesday, November 3 2010   14:47 

Compensation Levels Up

Following the recent banking crises, we scan the horizon to see how the dust is settling on the offshore bank industry. Offshore Britain (that's Jersey, Guernsey and the Isle of Man) hardly covered itself in glory during the recent banking crisis, and expat depositors - at any rate, those whose funds survived the crash - must be wondering where to turn if they want to improve their banking arrangements.

No amount of investigation will afford peace of mind unless it throws a spotlight on the two main areas of perceived vulnerability; the first concerns depositor protection, and the second relates to the all-important question of compensation should a bank based in one of these centres go to the wall - and let's face it we now know they do.

Compensation largesse ...

Well, things may be beginning to look up, albeit rather slowly. Since the collapse of Kaupthing Singer & Friedlander on the Isle of Man and Guernsey's Landsbanki, these centres have updated their depositor compensation regulations. Both islands' Financial Services Authority's have brought their maximum compensation allowance into line with the UK's at £50,000. And Jersey followed suit some months later.

... and limitations

The devil, as always will be in the detail, and expatriate depositors should remain on guard. Don't assume, for example, that new regulations adopted by one jurisdiction will automatically apply to another. For better or worse, Britain's three offshore centres operate independently. Be sure to check what will happen, supposing the worse comes to the worst, in the following circumstances.

• Will joint depositors each receive the maximum amount, or only 50% thereof?
• Will a limit be imposed on the overall claim by all depositors before the compensation kitty is closed?
• Who owns the bank? If, for example, you have several accounts spread across a number of banks, but all happen to be ultimately owned by the one parent (think Banco Santander owning Alliance & Leicester International, Bradford & Bingley International and Abbey International), will it be incumbent on the parent bank to compensate you if you've been let down by more than one of its wayward offspring?

Spread your balances

Rex Cowley, Director with Close Private Bank, explains that for the past 18 months, expatriates have been deliberately spreading their balances across a range of jurisdictions (finance centres) whilst making sure their deposit totals never exceed the compensation ceiling. "So, if the sum is £250,000 it is spread across five banks. Security is more important than return," he confirms.

Despite lining up all the compensation ducks in a row, the centres were criticised by depositors at the start for being slow to react. However, all depositors with Landsbanki Guernsey have so far received 67.5p in the £1 back and both the FSC and the liquidators are optimistic of returning up to 91p in the £1 by the time their work is finished. Guernsey has brought in its compensation scheme after the bank's collapse but did not make it retrospective. And it took a similar stretch of time for KSFIOM depositors to be compensated. Under the Isle of Man's compensation scheme 75% of depositors have received back their total deposit lost, and the FSC is hopeful that the liquidators will claw back as much as 96p in the £1 for all depositors of their total lost balances, even those that exceeded the £50,000 compensation limit. 

Bringing nest-eggs back onshore

When you compare these tales with those of UK-based depositors who received their money back in full regardless of the amount compensated and quickly saving months of anxiety, it is understandable why many expatriates are knocking on the doors of UK banks anxious to return their deposits to a jurisdiction where the level of depositor compensation is guaranteed. But here’s the rub. Despite the UK government's confirmation that there is no legal barrier preventing expats from opening a UK bank account, many are being turned away. The banks claim that 'know your customer' (KYC) legislation demands applicants provide a UK address. They maintain that if you can’t confirm who you are, where you live in the UK, and how you earn your money, they are barred from offering you a British High Street banking service and will direct you instead to their offshore subsidiaries.

All of which means many expats are forced to keep their money in offshore locations. If this is your situation, Graham Barnes, International Director of The Fry Group, suggests your best bet would be to bank offshore with a major UK clearing bank (such as HSBC Bank International, Lloyds TSB Offshore, Barclays International) on the basis that the UK government would not allow such an institution to collapse. And for those of you about to embark on a new life abroad, my best advice would be don’t close down your UK bank account – you never know when you may need it!

- How to avoid another Kaupthing Singer & Friedlander