Customers Warned Against Keeping Loans And Savings Together

Mon, 18 Feb 2008

Customers who have their loan and savings held with the same bank or building society could soon be excluded from receiving compensation if their bank goes under.

A recent report published by the Treasury, the Bank of England and the Financial Services Authority, outlining serious concerns about the Financial Services Compensation Scheme (FSCS), warns that customers could face their own "liquidity crisis" if the savings they have in the bank are worth less than their mortgage .

Customers are entitled to claim a maximum of £35,000, under the FSCS, if their UK-regulated bank goes bust, but must first deduct any outstanding debts, such as mortgages, to the failed bank .

If a customer owes the bank more than the amount of money held in their savings account, they will become "ineligible" for any compensation .

The report states: "This makes it more complicated for depositors to understand their level of coverage and means that customers with both short-term deposits and illiquid long-term loans held at the same bank, for example, a mortgage, may suffer a loss of liquidity following a bank failure."

UK banks are under increasing pressure over their exposure to frozen credit markets, although it is unlikely that any bank will go bust.

Kevin Mountford of comparison site Moneysupermarket.com explained: "This report is particularly concerning as some customers have their savings with one brand of a bank, and a mortgage with another brand. As a result, building up a portfolio of products with one provider might not be the best course of action.

"Consumers not only need to spread their savings around but also guard against having both their mortgage and savings with the same organisation," he added.
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