Savers with large amounts of cash on deposit should take action now to protect their money as the credit crunch threatens to sink more banks.

The Financial Services Compensation Scheme (FSCS) underwrites a £35,000 per person per bank repayment guarantee in the event of a crisis.

On the face of it, the FSCS pays out if savers have up to £35,000 squirreled away in a savings account – but rules for receiving compensation are not as straightforward as they seem.

Reading the small print reveals the rules actually say that if a saver has up to £35,000 on deposit in any number of accounts at the same bank, only the first £35,000 of the total amount is protected

Those at particular risk are savers with personal, partnership and business accounts with the same banking groups

FSCS is triggered if a bank, building society or credit union cannot settle or is unlikely to settle claims from savers – providing the institution is authorised under a banking licence in the UK.

The problem is many banks are groups operating on one licence, and although savers may feel their money is safe, they are at real risk of losing a lot of money if the banking group collapses.

In the current dog-eat-dog world of banking, a saver may unwittingly have cash outside FSCS due to a take-over or merger, even though they may know about the scheme’s shortcomings and have already taken action to protect their cash.

Here’s a list of the main banks and financial institution groups that operate under umbrella licenses:

· LloydsTSB, The AA, Bank of Scotland, Halifax, Birmingham Midshires, Intelligent Finance, Saga, Cheltenham and Gloucester

· Nationwide, Cheshire and Derbyshire Building Societies

· Barclays and the Woolwich

· Royal Bank of Scotland and Direct Line

· Clydesdale and Yorkshire Bank

· The Post Office and Bank of Ireland

· Co-op and Smile

· Abbey, Cahoot, Alliance and Leicester and Bradford and Bingley savings accounts

Under FSCS rules, if you have more than £35,000 in a single name or joint names in any of these groups, then disperse the money straight away in to sums of less than £35,000 at banks and building societies operating under separate licenses.

Most other big players like HSBC hold individual banking licenses.

Keep an eye on any cash you may have with the Alliance and Leicester – the Abbey recently swallowed the bank and at the moment they are trading on separate licenses, but this may change at short notice.

The FSCS raises money for compensation from a levy paid by member financial institutions.

Chancellor Alistair Darling has hinted that the £35,000 FSCS limit may go up to £50,000 in the near future.

Banks outside the UK

By law, overseas financial institutions should request Financial Services Authority permission before they open for business in the UK.

Many of these firms are not covered by the FSCS and savers should carefully check the firm’s terms and conditions before depositing money, however good the deal may seem.

The Post Office bank looks a good safe bet for savers as trading is under the same licence as the Bank of Ireland. The Irish government has recently announced all Irish banks are covered by a 100% compensation guarantee.

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