‘How safe are offshore accounts?’

April 2, 2008 at 2:35 pm

With the worldwide credit crunch making financial institutions desperate to attract our investment, savers are being lured by offers of high interest rates. This applies, not only to the familiar high street banks and building societies, but even more so to offshore accounts. Indeed Scarborough Channel Islands and Kaupthing, Singer and Friedlander on the Isle of Man are offering generous interest rates on their accounts. Admittedly you have to deposit a minimum of £5,000 with the Scarborough and £10,000 with Kaupthing Singer and Friedlander but these rates are not to be sniffed at.

Many of us have the perception that offshore accounts are either for the mega rich or for decidedly shady investors. However, with over three million of us in the UK having deposited £180 billion this is beginning to seem unlikely. It’s all very well getting a good return on our money but just how safe are these accounts?

If a difficulty of Northern Rock proportions were to arise on an offshore account, could we be confident that our hard earned cash was secure, or would we be advised to have an open air ticket to Jersey at the ready at all times? With many of the offshore accounts requiring a minimum deposit of £25,000 there is a lot more at stake than in the average Northern Rock account.

In the UK the Financial Services Compensation Scheme (FSCS) guarantees the first £35,000 of your savings with ‘’’any institution’’’ (not "per account"). Prior to the Northern Rock crisis, the scheme was limited to the first £2,000 and then restricted to 90% of the next £33,000. The bad news is that there is absolutely no depositor protection in Jersey or Guernsey.

Although the latter has passed enabling legislation, there is no scheme in existence as yet. The Isle of Man is probably the only “true” offshore jurisdiction with a protection scheme, although it is far more limited than in the UK. Under the Banking Business (Compensation of Depositors) Regulation 1991, only 75% of the first £20,000 is covered, meaning that no matter how huge your bank balance is, if things go pear shaped you are only guaranteed to get £15,000 back. Unlike the UK though, this protection extends to foreign currency deposits and not just to sterling.

Although it is highly unlikely that you are going to come unstuck, the Northern Rock problem has made us all that bit more aware that things can go wrong. It is therefore well worth doing your homework before joining the ranks of the offshore investors. Check the credit rating of the bank to whom you are about to entrust your savings and also see whether perhaps you would be covered by the UK parent company of any offshore subsidiary. For instance, Abbey National Offshore has branches in Hong Kong and Dubai, and although deposits are not covered by the FSCS they are guaranteed by Abbey National PLC.

For an offshore service provider’s directory see here. Full details of investor protection for various offshore accounts is given in a user friendly table.

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