Why is it that many of the savings schemes used by people on lower incomes offer very little protection if something goes wrong? It’s time to get tighter on the rules governing savings products to help the poorest.
Many families on low incomes aren’t in the habit of regular saving.
Whether it’s due to mistrust of banks or exclusion from mainstream finance, many turn to convenient, local alternatives such as Christmas clubs. But in doing so, they sacrifice valuable savings protection.
If a UK bank fails, savings up to £85,000 are covered by the Financial Services Compensation Scheme (FSCS). When many banks got into difficulty during the 2008 financial crisis, the government even stepped in to vouchsafe savers’ money.
Learn lessons from Farepak collapse
And yet, back at home, the 116,000 savers with failed hamper company Farepak are still fighting to get their money back five years after the company’s collapse.
A liquidators’ report in October 2011 estimated that Farepak victims might eventually get about 15p in the pound. This unfairly penalises many of those who need the most encouragement to save.
It’s similar with supermarket savings stamps. If the retailer goes bust, you’re not covered under the FSCS and you’ll have to join the queue with other creditors, with little hope of getting back more than pennies.
If you buy gift cards or vouchers at a high street store, your protection is similarly weak. There needs to be more protection for unregulated savings schemes that fall outside of the FSCS’ remit.
Ring-fence savers’ money
Businesses like Farepak should have stronger obligations, which force them to ring-fence savers’ money from their own operations. In the meantime, I’d encourage consumers to ditch Christmas savings clubs in favour of their local credit union.
We’ve often struggled to create a savings culture in the UK that inspires confidence, and the plight of the Farepak victims risks even greater disengagement for those on low incomes. There has to be a better way of protecting people’s money.