I wouldn’t put a ton of money in Revolut either, it doesn’t have an official banking licence (though it seems to be offering current accounts on its site? strange) so it isn’t FCSC protected- you are covered up to £85,000 usually. It’s not like I have a massive amount of money at the moment to lose, but I’d imagine it would be a concern to people who are earning a lot more money and looking for a bank to properly keep savings in.
@PeteyPie Eve makes an important distinction here. From a regulatory point of view Revolut are not a bank as they don’t have full authorisation and therefore deposits are not covered by FSCS. Instead your money with Revolut sits in a ring fenced client account - Barclays possibly? They operate under E-Money Regulations which have different requirements and protections to a full banking licence.
They have applied for EU full banking authorisation, though in the past Nik has claimed that their customers are safer under their current operating structure as their money is ring fenced, as opposed to a fully authorised tier 2/3 bank…
FCSC protection is what is called deposit insurance and it only exists to provide what is called an “off-equilibrium threat” as a solution to the problem of a bank run (bad equilibrium in the Diamond-Dybvig Model). Bank runs can occur on banks because they engage in maturity transformation (where they lend out your short-term demand deposits and make long-term loans).
Economics aside, because…
… this means that your money is 100% safe already and there is no prospect of a bank run (such as what happened when we saw long queues outside Northern Rock during the onset of the financial crisis) that would need deposit insurance i.e. FCSC protection in the first place.
I completely understand why consumers have misunderstandings about this because for peace of mind we look for things like regulation and licences as they equate to security for us. My ten pence on this; hopefully it’s helpful.
I’ve used Revolut for 9 months without any problems and it’s saved me a considerable amount of money. I highly recommend them based on my experience. Take time to understand the T&Cs, especially the account limits and issues are unlikely.
Could you elaborate a little more on this please? I don’t have much in-depth knowledge about the workings about banks so I’ve always just presumed this scheme existed to protect consumers and it’s just something companies with an official banking licence had. (though I understand it doesn’t protect every user in the UK depending on where they live)
So if something were to happen to Revolut, would you just be able to withdraw all the money that you hold in your account?
This presumption is entirely correct. FCSC protection for banks in particular exists to prevent bank runs (too many customers attempting to withdraw their money at the same time) which causes the bank itself liquidity problems that can lead to the bank failure. If a bank fails, then customers lose money. Therefore, preventing them is the primary form of protection and this is what deposit insurance does (stops perverse incentives of depositors lining up outside the bank all trying to withdraw their money) because you know that with FCSC protection you don’t need to worry because the governments guarantees that even if the bank were to fail, you wouldn’t lose any money.
Essentially if Revolut or the company behind their segregated accounts failed, your money would not be lost. It’s protected by a ring fence so that after all the necessary admin/litigation has been processed, your money will be returned to you and not creditors. This is the case with Glint Pay (another app that i use) and Monzo before it became a licensed bank. Maybe @simonb could confirm this.
I always understood it as if Revolut went bust you’d get your money back as it’s ring fenced by say Barclays. But if Barclays went bust you aren’t guaranteed the money.
Is my money safe?
Client funds are stored under a segregated account at Lloyd’s or Barclays, depending on the type of account you hold. As an FCA authorised institution, Revolut safeguards your funds as per FCA requirements, the Electronic Money Regulations 2011, and the Payment Services Regulations 2017. In the event of an insolvency of Lloyd’s or Barclays, you will be able to claim your funds from this segregated account and your claim will be paid above all other creditors.
Ringfenced funds figuratively have a moat built around them. The funds are not lent out by the ringfence provider, e.g. Barclays, nor the e-money institution, e.g. Revolut. They are not lost as they can’t magically disappear.
This, of course, is a massively important aspect: FSCS promises your money back within a few days. This process is likely to take significantly longer - I could see it dragging on for many months - all the while you are potentially penny less.
Also, ringfencing has one important weakness: as far as I can see it offers no protections against malicious acts, or system failures (ie if money for whatever reason doesn’t make it into the ringfenced account, or disappears from it).
Generally, this is the FSCS promise…
However, it’s not a simple, short process. The FSCS will only pay out once is declares the bank has defaulted (this will not done after an investigation and will not be quick if the bank isn’t a Systemically Important Financial Institution) and after the depositor has made a formal claim.
See the link for more info.
This is just conjecture (are you citing any valid theory/evidence behind the weakness of ringfencing?) and could apply equally to a bank. At the end of the day, in both cases a consumer has to make a judgement about who the can trust to place their hard earned money with.
Isn’t this (i.e. “not a simple, short process”) conjecture as well? Do we have historical precedence?
I have two theories, based on two facts:
- Fact: No software is perfect. Theory: Every software can have bugs. Consequently there may be a lack of funds in the ring fenced accounts due to software failure.
- Fact: Criminals exist. Theory: Consequently there is a possibility that funds may be missing from the ring fenced account due to criminal actions.
I don’t think these things apply “equally” to FSCS protection: This is basically guaranteed, as it’s backed by the government: Even if a criminal were to rob the FSCS of all funds, then the government would chip in. Of course there are other risks (government default, total collapse of government) which are unique to FSCS. I’m not disputing this, and I’m not saying FSC is perfect, or superior to ring fencing in every aspect. I’m just saying ring fencing isn’t perfect either.
That I wholeheartedly agree with!
What I don’t agree with is some providers advertising 100% security of your deposits thanks to ring fencing, or even just claiming that ring fencing is inherently better than FSCS protection in every way. That’s just not true.
I think the most recent example of ring-fenced client money being jeopardised is that of Beaufort Securities, who were rightly shunted into insolvency by the FCA.
The key issue in this case is the smash and grab being carried out by PwC, who initially quoted a £100m fee to wind up the business. As Beaufort were as light on assets as they were on integrity (DoJ indictment incoming), the administrators fees will have to come from somewhere…
Though, PwC have as of last week offered close to a 50% reduction in fees (oh the benevolence!) but this hasn’t yet been agreed. Minor digression: the likely net outcome is some clients will lose money.
@nanos is absolutely right that the assertion of ring fenced money is as safe as houses (oops) is really not 100% correct but @evangelskies, to go back to your question in a round about way, Theodore makes the most important point on this when he said this:
And key to making those calls is having abundant and accurate information.
Links to the Beaufort situation below, I think this constitutes as some evidence.
[Title: Beaufort Securities’ clients in angry clashes with PwC]
Do you mind sharing the title of that story? It will allow those who don’t have an FT sub to read it after a Google search.
Crumbs, apologies @nanos i’ve now updated my post.
Fair enough. I only engaged in this discussion above to educate others from my knowledge of the Diamond Dybvig Model why deposit insurance exists in the first place. So anything other than this the providers can answer, hence why I provided links for further info. I’m not here to defend e-money institutions not banks, but just to give my ten cents where I can provide truths.
In this case, nobody I’ve seen here has made a claim that ringfencing is better than deposit insurance, nor vice versa, so all is good.
For Beaufort Securities - if I remember correctly - PwC said they expected the proceedings to take up to 4 years. As you only get your money back after the proceedings are finished I can only say “ouch”!. (Although, of course, 4 years is absolutely worst case - but even 1/4 of that is a loooong time …)
Absolutely! I’ve heard about this case you’ve cited somewhere else in this forum and it’s quite incredulous tbh. Leach-like behaviour from PWC (unsurprising given what happened to Carillion) and could prove a real blow to ringfencing.
That’s true. I saw a competitor recently advertise this (forgot who it was) and it turned me off immediately. Whenever someone says “100% security” my immediate reaction is “Thanks for your time…”
@nanos @Theodore the quoted fees are simply outrageous. Lehman’s was another example, though the scale and complexity unwinding and winding up that quagmire definitely put that into an all together different universe.
I’ll refrain from sharing what I really think about the big 4’s practises. I wouldn’t want to be responsible for bleeding eyes, at least not on a Friday!
Oh absolutely! However as I said above to me they are a “bank” they offer the same service, just with different levels of protection and service, I just wanted a card to use in shops, I was never going to put my life savings in there.
I wish everyone using them the best, the service just isn’t for me.