The thing about useful stuff is: HBOS and the Deposit Protection Scheme

HBOS and the Deposit Protection Scheme Thursday, September 18, 2008

Image via WikipediaSadly I am marked out in our family social circles [school parents and friends etc] as someone who allegedly knows about technology matters [translation - "you can fix my computer/printer/network"], and similarly knows about Finance. Consequently, the last few days have invariably involved answering questions about a) what's going on in the City and share prices and b) is my money safe with XXXXX.

Listening to people, common misconceptions and superficial knowledge abounds, much of which has been recycled from the "popular" press e.g. the evils of short sellers, the fault of the banks in giving too much credit [setting aside that many people benefited from loose credit in the economy], derivatives being the cause [ask people what they are referring to or to define them and the conversation stops], speculators / hedge funds being villians.

I confess that I have greatest difficulty answering b), partly because the repercusions of a wrong answer are immense. Hence, I've tended to limit my answer to "Go to a big institution - the bigger the better for now". HSBC, Barclays Bank, RBS and LloydsTSB probably count as too big to fail, but it's getting harder to make that call. I've supplemented this with the guidance that diversifying deposits between institutions is wise, and if you are particularly concerned then have regard for the amount covered under the Deposit Protection Scheme in the UK.

The Scheme covers up to a limit of £35,000 per customer for the total of their deposits with an organisation, regardless of how many accounts they hold or whether they are a single or joint account holder [a joint account for 2 people counts as 2 customers in this regard]. The scheme also nets off deposits against any loan balances i.e. any monies owed on a mortgage or overdraft will be offset against any deposits and the net amount covered under the scheme.

However, the sting in the scheme covers the word "organisation". Different banking groups operate slightly different structures. In the case of RBS, which also owns the NatWest brand, these legally operate as distinct organisations for the purposes of the scheme. However, Halifax, Bank of Scotland and Birmingham Midshires, which are all part of the HBOS Group, only count as one organisation [Bank of Scotland plc] - all the brand names are Divisions of the same organisation.

This subtle distinction is not obvious to the "man in the street" and if you asked customers of these Divisions who their deposits were with placed with, I am confident that a sizeable majority would answer with the brand name. By extension of this, it is likely that by virtue of historical arrangements or ignorance, some customers will indeed have separate relationships with different parts of the HBOS without realising they are dealing with the same entity.

Importantly, you couldn't blame them for such an error. Inspecting several of the websites of the HBOS group that accept deposits, only Birmingham Midshires makes clear on its' home page that it is a Division of Bank of Scotland plc. In contrast, no reference is made to this on the Halifax home page, despite its' significance - you have to check the Contact Us section in one of the footer links to find this.

To their credit, the BBC have been reporting this issue for several months, including today.