STOP PRESS: the Government has said it will compensate all Ice Save depositors in full. 

In a separate move, ING Direct will acquire £2.5bn of deposits held by 160,000 customers from Kaupthing Edge, the internet-only UK retail arm of Iceland’s biggest bank.

ING Direct is also taking control of £538m of savings held by 22,200 people with Heritable Bank, which was run by Iceland’s Landsbanki - Icesave’s owner.

With the collapse of Iceland’s second largest bank, Landsbanki, yesterday the grim reality of the credit crunch is starting to hurt British savers for the first time in a real way.

Some 300,000 UK savers have an average deposit of £15,000 in Landsbanki’s popular IceSave account which featured regularly in the best buy tables.

Under the deposit protection arrangements in Iceland, the Icelandic authorities would normally pay depositors the first €20,887 of compensation (£16,300), while the UK’s Financial Services Compensation Scheme (FSCS) would make up the rest of any claim up to the increased limit of £50,000 (which luckily came into effect yesterday).

But this morning, the Chancellor, Alistair Darling said that the Icelandic compensation scheme had no money in it and that the UK government would pick up the tab and compensate UK savers in full.

 This latest collapse brings home to UK savers the fact that foreign-owned banks can make claiming compensation a more complicated and risky process.

In the Defaqto term accounts best buy table on Tuesday (prior to the announcement of Landsbanki’s collapse), no fewer than seven of the accounts listed were from non-UK banks http://www.defaqto.com/consumer/savings-accounts/term-accounts.aspx.

Of these two were from Anglo Irish Bank, which now enjoy a 100 per cent guarantee from the Irish government. But three of the accounts were Landsbanki IceSave accounts, one was from Dutch-owned AK Bank NV and one was provided by the Indian bank ICICI.

While there is nothing inherently wrong with saving in a foreign-owned bank, depositors should check what the arrangements would be if anything went wrong. Levels of compensation vary from country to country and their authorisation.

To date, however, the UK Government has compensated depositors in full.

For more on the FSCS:
www.fscs.org.uk
Why not invest regularly with a mutual building society:
http://www.defaqto.com/consumer/savings-accounts/regular-savings-accounts.aspx