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Millions of business deposits could be unprotected under savings comp scheme – time to shop for a new bank?

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Many small businesses in the UK will bank with the same outfit for both their personal and business affairs thinking their personal and business deposits are protected under the Financial Services Compensation Scheme (FSCS). But that could be a serious mistake depending on your company structure, especially in a post-Brexit world. The Freelance Informer reports.

British savers will still have up to £85,000 of personal cash savings safeguarded after Brexit, but a slump in the pound could mean those in the UK could have less money protected compared to those on the continent until 2025, it has been reported.

The Financial Services Compensation Scheme and the Bank of England have confirmed the £85,000 guarantee if a bank or building society goes bust would remain after the UK exits the Brexit transition period, which as of 1 January has already started.

There is a difference post-Brexit. The protection scheme was introduced under EU rules, which means the Bank of England no longer plans to keep the amount protected aligned with the €100,000 safeguarded under the EU’s own guarantee.

What about company deposit claims?

“We generally protect companies’ deposits, regardless of the size of the company,” said the FSCS. “We assess eligibility under the PRA’s Depositor Protection Rules, in particular rule 2.2. Most types of regulated financial services company are not eligible though.”

However, if a UK-authorised bank, building society or credit union fails, the FSCS will automatically compensate each eligible company depositor, but only up to £85,000. There’s a catch, though, if you are a sole trader you are not entitled to more than one claim.

I’ve got a small business account and a personal account with the same bank – are both accounts covered up to £85,000?

If your business is a separate legal entity, e.g., a limited company or LLP, you could claim up to £85,000 for each account.  If you’re a sole trader (e.g., Mr Smith t/a Smith Motors) you wouldn’t be entitled to two separate claims – you could claim up to £85,000 in total. With this nugget of information, it might be wise to start shopping for a new bank, either for your personal affairs or your business.

You might think that you will never even have £85,000 in your account at any one time, so why bother looking for a new bank. But what if you were a sole trader that just sold your house, and there was a delay in either purchasing another house or investing that lump sum? For example, what if while all the proceeds of the sale were sat in one bank and that bank went bust? Then what?

Although joint account holders are usually entitled to make separate deposit claims for £85,000 each, if the joint account holders hold the account as partners in a business, then the business partnership is only entitled to a single claim of £85,000 (not one claim per business partner).

Insurance claims

FSCS assess eligibility for insurance claims under the PRA’s Policyholder Protection Rules, in particular rules 7 and 8.

Generally, firms with an annual turnover of more than £1 million aren’t eligible for general insurance claims. The same goes for most types of authorised financial services firms.

For general contracts of insurance that are compulsory, usually all firms are eligible, regardless of size or authorisation status.

All firms are generally eligible for long-term insurance contract claims, regardless of size or authorisation status. Realistically, this may not occur very often in practice though, as companies don’t have pensions or annuities.

Investment claims

“For investment claims, we use the FCA’s Compensation Sourcebook, in particular COMP 4, to assess if your firm is eligible to claim compensation with us,” said the FSCS.

Your firm must qualify as a ‘small company’ under section 382 of the Companies Act 2006 to be eligible. There are three criteria in the test – annual turnover, balance sheet and number of employees – and your firm must meet two of the three criteria to qualify as ‘small’.

Check if you can claim here.

Time to shop for a new business account?

A good place to start is Which? which has business banking comparison tables, which you can access here. Before you make the leap to a new business or personal bank account, do your homework and look for reviews, especially with challenger banks that may not have easy access to real-people via a phone call and be mostly through chatbots, which may not bode well for some.

However, if the challenger bank is offering services that could save your business in transaction or currency fees, then it is worth looking into. But always look for the terms of their deposit security schemes and whether they are regulated in the markets you trade in predominately, especially if you are an e-commerce business.

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